Determinants of Ex-Ante Banking System Distress: A Macro-Micro Empirical Exploration of Some Recent Episodes

Author: Ms. Brenda Gonzalez-Hermosillo

This paper empirically analyzes the contribution of microeconomic and macroeconomic factors in five recent episodes of banking system problems in the U.S. Southwest (1986-92), Northeast (1991-92), and California (1992-93); Mexico (1994-95); and Colombia (1982-87). The paper finds that a low capital equity and reserve coverage of problem loans ratio is a leading indicator of bank distress, signaling a high likelihood of near-term failure. Distress is shown to be a function of the same fundamental macro-micro sources of risk that determine bank failures. Focusing on distress has the advantage that the fragility of the banking system can be assessed before a crisis actually occurs.

Volume/Issue: Volume 1999 Issue 033

Publication date: March 1999

ISBN: 9781451845167

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Topics covered in this book

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Business and Economics , Banks and Banking , WP , coverage ratio , bank distress , performing loan , equity capital , Banking crisis , Banking sector fragility , survival time , hazard ratio , credit risk , Commercial banks , Distressed institutions , Nonperforming loans , Loans , Asia and Pacific , Global

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Summary

This paper empirically analyzes the contribution of microeconomic and macroeconomic factors in five recent episodes of banking system problems in the U.S. Southwest (1986–92), Northeast (1991–92), and California (1992–93); Mexico (1994–95); and Colombia (1982–87). The paper finds that a low capital equity and reserve coverage of problem loans ratio is a leading indicator of bank distress, signaling a high likelihood of near-term failure. Distress is shown to be a function of the same fundamental macro-micro sources of risk that determine bank failures. Focusing on distress has the advantage that the fragility of the banking system can be assessed before a crisis actually occurs.