Predicting Banking Distress in the EMEAP Economies
Posted: 25 Feb 2011
Date Written: February, 24 2011
This study develops a panel probit model to identify the leading indicators of banking distress and to estimate the banking distress probability for EMEAP economies. Macroeconomic fundamentals, currency crisis vulnerability, credit risks of banks and non-financial companies, asset price gaps, credit growth, and the occurrence of distress in other economies are found to be important leading indicators. The model is applied to stress test the Hong Kong banking sector. Simulation results suggest that compared with the period before the Asian financial crisis, the banking sector is currently more capable of withstanding shocks similar to those that occurred during the crisis.
Keywords: Asia Pacific economies, banking distress, early warning systems, econometric models, stress testing
JEL Classification: E44, E47, G21
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