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ID: 117677

Effect of reliance on international funding on banking fragilit: evidence from East Asia / Hamid, Fazelina Sahul

Hamid, Fazelina Sahul	Journal Article
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Publication

2013.

Summary/Abstract

The East Asian crisis highlights the importance of liquidity for smooth functioning of the banking system. It also shows the vulnerabilities that arise as a result of high dependence on international liquidity. This article empirically analyses the influx of liquidity before the crisis and illiquidity during the crisis in finding out whether banks in East Asia held 'too little' or 'too much' liquidity before and during a crisis and how their vulnerabilities to failure changed as a result of that. Instrumental Variable estimation is used to dissociate the effect of international illiquidity on banks' liquidity risk during a crisis year. The study finds that the effect of liquidity on the probability of bank failure varies before and during a crisis. The findings also highlight the vulnerabilities of banks to failure as a result of international illiquidity and high reliance on external funding. These findings bring forward the case for stronger regulation of banks' liquidity, which can be brought forward by better liquidity management.

Key Words

East Asia ; Liquidity ; Banking Fragility ; G21 ; N20

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ID: 120081

Indicators of banking fragility in India: an empirical test / Bhattacharya, Basabi; Roy, Tanima Niyogi Sinha

Bhattacharya, Basabi	Journal Article
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Publication

2012.

Summary/Abstract

The study presents an early warning system for predicting banking fragility in India. Using the index method, distress episodes in the banking system are identified during 1994-2007. On the basis of standard tools of probit regression models, the results indicate growing interlinkages of economic liberalization with the Indian banking sector. Slowdown in real output, increase in headline inflation rate, increase in spread between the central bank policy rate and short-term risk-free rate, increase in proportion of broad money supply to foreign exchange reserves, REER overvaluation from trend and decrease in proportion of trade balance to GDP enhance the probability of banking fragility in India. The behaviour of the identified crucial indicators, cross-checked by the signal extraction approach, reveals adequate signalling power due to their low Noise-to-Signal Ratio. The estimated 'lead time' of the indicator variables in signalling banking distress also offers a modest time period to the government to initiate pre-emptive policy action to strengthen the banks.

Key Words

Forecasting ; India ; Financial Crisis ; Banks ; Discrete Choice Models ; G21 ;
G01 ; F47 ; C35 ; O53

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