Default, Credit Growth, and Asset Prices

44 Pages Posted: 31 Oct 2006

See all articles by Miguel Segoviano Basurto

Miguel Segoviano Basurto

International Monetary Fund (IMF) - Monetary and Financial Systems Department

Boris Hofmann

Bank for International Settlements (BIS) - Monetary and Economic Department

Charles Goodhart

London School of Economics & Political Science (LSE) - Financial Markets Group

Date Written: September 2006

Abstract

This paper uses a Merton-type estimate of the probability of default (PoD) for the main banks in a sample of Organization for Economic Cooperation and Development and middle-income countries as a proxy for the fragility of their banking systems. Based on theory and stylized facts, the paper explores a range of financial and real variables that explain such PoDs across time. We find property price fluctuations and bank credit to be important explanatory factors. There is two-way interaction between these variables and a clearer relationship when the variables are entered as a deviation from trend. The lag structure between such developments and PoDs is long and varies widely across countries. The paper assesses the implications of these findings for economic policy.

Keywords: Probability of default, credit risk, systemic risk, macroeconomic shocks, stress testing, financial surveillance

JEL Classification: C14, C22, C50, C61, C82, E32, E37, E44, E51

Suggested Citation

Segoviano Basurto, Miguel and Hofmann, Boris and Goodhart, Charles A.E., Default, Credit Growth, and Asset Prices (September 2006). IMF Working Paper, Vol. , pp. 1-44, 2006. Available at SSRN: https://ssrn.com/abstract=941285

Miguel Segoviano Basurto (Contact Author)

International Monetary Fund (IMF) - Monetary and Financial Systems Department ( email )

Washington, DC
United States

Boris Hofmann

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Charles A.E. Goodhart

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom
0207 955 7555 (Phone)
0207 242 1006 (Fax)

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