Capital Account Openness and Early Warning System for Banking Crises in G20 Countries

Abstract

This paper develops an early warning system for banking crises in the G20 countries, with the inclusion of capital account openness indicators. Results suggest that the capital account openness demonstrates a significant predictive power on systemic banking crises, and the impact is related with the level of the economic development. For low-income countries, increased capital account openness has a significantly negative impact on the banking crises likelihoods, while for high-income countries it imposes a positive impact. For middle-income countries, however, the occurrence of banking crises is more indifferent to capital account liberalization.

Keywords: Banking crises; Capital account openness; Early warning system; Systemic risk; Panel logit regression

JEL Classification: G01; C23; G21