Banking Industry Volatility and Banking Crises
University of New South Wales (UNSW) - The Australian School of Business; Financial Research Network (FIRN)
University of Western Sydney
Journal of International Financial Markets, Institutions and Money, Forthcoming
While studies using balance-sheet information of banks and macroeconomic indicators to forecast banking crises are prolific, empirical research using market information of banks is relatively sparse. We investigate whether banking industry volatility, constructed with the disaggregated approach from Campbell et al (2001) using exclusively publicly available market information of banks, is a good predictor of systemic banking crises in the analyses including data from 18 developed and 18 emerging markets. We find that banking industry volatility performs well in predicting systemic banking crises for developed markets but very poor for emerging markets, which suggest that the impact of market forces on the soundness of the banking system might be different for developed and emerging markets. We also find that those macroeconomic and banking risk management indicators have different impact on the probability of banking crises. Therefore, the traditional cross-country results of the studies on banking crises need to be interpreted cautiously.
Number of Pages in PDF File: 27
Keywords: Banking crises, Volatility, Market forces
JEL Classification: G15, G21, G28Accepted Paper Series
Date posted: August 25, 2008
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