Comparing early warning systems for banking crises

Despite the extensive literature on prediction of banking crises by Early Warning Systems (EWS), their practical use by policy makers is limited, even in the international financial institutions. This is a paradox since the changing nature of banking risks as more economies liberalise and develop their financial systems, as well as ongoing innovation, makes the use of EWS for crisis prevention more necessary than ever. In this context, we assess the logit and signal extraction EWS for banking crises on a comprehensive common dataset. We suggest that logit is the most appropriate approach for global EWS and signal extraction for country specific EWS. Furthermore it is important to consider the policy maker s objectives when designing predictive models and setting related thresholds since there is a sharp trade-off between correctly calling crises and false alarms

Early warning signals and their role in preventing banking crises. The Czech Republic case.

In recent decades many countries have experienced banking crisis, for example Mexico (1994-1995), East Asian countries (after 1997) and transition economies (in 1990´s). The Czech Republic can not be omitted. The aim of this article is to characterise the role of early warning signals in measuring the vulnerability of countries to systemic banking crisis and to analyse how successfully these indicators could have been able to predict the banking crisis in case of Czech Republic. The first part of this paper defines the term banking crisis and describes indicators of banking crisis. The content of the second part of the paper are the individual early warning signals. The next part contains the characteristics of banking crisis in the Czech Republic. The last chapter tries to analyse the level of success of early warning signals in predicting the banking crisis in the Czech Republic.banking crisis; nonperforming loans; bank failures; GDP growth

The fiscal costs of financial instability revisited

This paper conducts a comprehensive analysis of the fiscal costs of financial instability (defined as major asset price changes and including, as extreme cases, financial crises). The study identifies three channels to fiscal accounts: 1) revenue effects on capital gains, asset turnover and consumption tax, 2) bailout costs as asset price declines undermine balance sheets of companies/banks, and 3) second-round effects from asset prices changes via the real economy and via debt service costs. A panel analysis and case studies show that episodes of financial instability increase the variability of fiscal balances. Moreover, fiscal costs are often very large and much larger than assumed in the literature so far with public debt rising by up to 50% of GDP during such episodes. These fiscal effects can also serve as a, so far under-emphasised, rationale for the deficit and debt targets in the EU?s Maastricht Treaty and Stability and Growth Pact. JEL Classification: H3, H6, E6asset prices, deficits, financial crisis, financial stability, Fiscal policies

Thoracic Pressure Does Not Impact CSF Pressure via Compartment Compliance

Space acquired neuro-ocular syndrome (SANS) remains a difficult risk to characterize due to the complex multi-factorial etiology related to physiological responses to the spaceflight environment. Fluid shift and the resultant change on the Cardiovascular (CV) and cerebral spinal fluid systems (CSF) in the absence of gravity continue to be considered a contributing factor to the progression of SANS. In this study, we utilize a computational model of the CSF and CV interface to establish the sensitivity that intracranial pressure, and subsequently the optic nerve sheath pressure, exhibits due to variations in thoracic pressure, assuming the cranial perfusion pressure, i.e. mean arterial pressure (MAP) to central venous pressure (CVP), is known. Methods: The GRC Cross cutting computational modeling project created as model of the CSF and CV interaction within the cranial vault by extending the work of Stevens et al. [1] by modifying the representative anatomy to include a separate venous sinus, jugular veins, secondary veins and extra jugular pathways [2-3] to more adequately represent the vascular drainage pathways from the cranial vault (Figure 1). Assuming the MAP, CVP and thoracic pressure are known, we initiated this enhanced computational model assuming a supine positon and utilized a linear ramp to vary the thoracic pressure from the assumed supine state to the target pressure corresponding to set MAP and CVP values. The model generates the time based CSF pressure values (Figure2). Results and Conclusions: Following this analysis, CSF pressure shows significant independence from thoracic pressure changes (16 mmHg in thoracic pressure produces < 1mmHg change in CSF pressure), being mostly dependent on perfusion pressure. Similarly fluid redistribution is not predicted to be impacted over a level of 1mL. We note that this simulation represents an acute changes (order of 10's of minutes) and does not represent the long term effects

Resolving systemic financial crisis : policies and institutions

The authors analyze the role of institutions in resolving systemic banking crises for a broad sample of countries. Banking crises are fiscally costly, especially when policies like substantial liquidity support, explicit government guarantees on financial institutions’ liabilities, and forbearance from prudential regulations are used. Higher fiscal outlays do not, however, accelerate the recovery from a crisis. Better institutions—less corruption, improved law and order, legal system, and bureaucracy—do. The authors find these results to be relatively robust to estimation techniques, including controlling for the effects of a poor institutional environment on the likelihood of financial crisis and the size of fiscal costs. Their results suggest that countries should use strict policies to resolve a crisis and use the crisis as an opportunity to implement medium-term structural reforms, which will also help avoid future systemic crises.Payment Systems&Infrastructure,Labor Policies,Fiscal&Monetary Policy,Financial Crisis Management&Restructuring,Banks&Banking Reform,Financial Crisis Management&Restructuring,Governance Indicators,National Governance,Banks&Banking Reform,Economic Conditions and Volatility

The role of European welfare states in intergenerational monetary transfers: a micro-level perspective

This article uses a comprehensive theoretical framework to explain why parents send money to particular children, and examines whether intergenerational solidarity is shaped by spending on various welfare domains or provisions as a percentage of gross domestic product. The theoretical model at the level of parents and children distinguishes parental resources and children’s needs as the factors most likely to influence intergenerational money transfers. Differences in state spending on various welfare domains are then used to hypothesise in which countries children with specific needs are most likely to receive a transfer. For parents we hypothesise in which countries parents with specific available resources are most likely to send a transfer. We use data from the first wave of the Survey of Health and Retirement in Europe (SHARE) to analyse the influence of welfare-state provisions on the likelihood of intergenerational transfers in ten European countries. The results indicate that, in line with our expectations, the likelihood of a transfer being made is the outcome of an intricate resolution of the resources (ability) of the parents and the needs of a child. Rather large differences between countries in money transfers were found. The results suggest that, at least with reference to cross-generational money transfers, no consistent differences by welfare state regime were found.

Money market pressure and the determinants of baning crises

Identifying banking crises is the first step in the research on determinants of banking crises. The prevailing practice is to employ market events to identify a banking crisis. Researchers justify the usage of this method on the grounds that either direct and reliable indicators of banks’ assets quality are not available, or that withdrawals of bank deposits are no longer a part of financial crises in a modern financial system with deposits insurance. Meanwhile, most researchers also admit that there are inherent inconsistency and arbitrariness associated with the events method. This paper develops an index of money market pressure to identify banking crises. We define banking crises as periods in which there is excessive demand for liquidity in the money market. We begin with the theoretical foundation of this new method and show that it is desirable, and also possible, to depend on a more objective index of money market pressure rather than market events to identify banking crises. This approach allows one to employ high frequency data in regression, and avoid the ambiguity problem in interpreting the direction of causality that most banking literature suffers. Comparing the crises dates with existing research indicates that the new method is able to identify banking crises more accurately than the events method. The two components of the index, changes in central bank funds to bank deposits ratio and changes in short-term real interest rate, are equally important in the identification of banking crises. Bank deposits, combined with central bank funds, provide valuable information on banking distress. With the newly defined crisis episodes, we examine the determinants of banking crises using data complied from 47 countries. We estimate conditional logit models that include macroeconomic, financial, and institutional variables in the explanatory variables. The results display similarities to and differences with existing research. We find that slowdown of real GDP, lower real interest rates, extremely high inflation, large fiscal deficits, and over-valued exchange rates tend to precede banking crises. The effects of monetary base growth on the probability of banking crises are negligible. --