The role of capital, liquidity and credit growth in financial crises in Latin America and East Asia

We construct a dataset of bank capital adequacy and liquidity to test their relationships to crises in Asia and Latin America. Event studies, logit and ROC estimations suggest these variables are valuable leading indicators of crises. They can be used to improve Early Warning System design although there are trade-offs between model simplicity, which implies less monitoring costs and complexity which may improve accuracy. There are significant differences between the regions so pooling assumptions are unsound. AUCs show that capital and/or liquidity can be used in a parsimonious model without substantial loss in crisis predictive accuracy. We find no direct role for credit growth in either region. Our results have implications for Asian and Latin American financial regulators concerned with the impacts of Basel III on their banking systems.This work is funded under ESRC Grant No. PTA – 053 – 27 – 0002, entitled “An Investigation into the Causes of Banking Crises and Early Warning System Design”

Could early warning systems have helped to predict the sub prime crisis?

One of the features of the sub-prime crisis, that began in August 2007, was its unexpected nature. It came as a surprise not only to most financial market participants but also in some degree to the policy community. In this context, we seek to assess whether early warning systems based on the logit and binomial tree approaches on the UK and US economies could have helped to warn about the crisis. We also consider a “check list approach” of indicators based on history. Although not all of the complementary approaches are successful, we contend that our work suggests that a broadening of approaches of macroprudential analysis is appropriate

EXPLORING THE SHORT- AND LONG-RUN LINKS FROM BANK COMPETITION TO RISK – RECONCILING CONFLICTING HYPOTHESES?

Using a dataset for the EU-27 covering 1998-2012, this is one of the first studies of banking competition and risk to look at the dynamics of the relation between these variables, to take account of a full 6 year period since the onset of the crisis in 2007, as well as a comparable period before it; and to compare and contrast results using two competition indicators, the H statistic and the Lerner index. Using the H statistics, we find that in the crucial pre crisis period, the change in competition has a positive effect on risk (measured by the Z Score), while there is a overall negative effect of the level of competition on risk. The Lerner index provides results supportive of the hypothesis that there are dynamic relations between competition and risk, in that the change in the Lerner index again correlates positively with risk (i.e. narrower margins when competition increases make banks weaker) while the long run effect of heightened competition is also to increase risk. Testing for the reason for differences in long run effects we find that the H and Lerner differ in their impact on the volatility of profits, a key input to the Z Score risk indicator. There are important implications for the interpretation of results in the literature based on these different indicators

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

Banking crisis in Asia and Latin America – A single pattern for emerging market economies?

Most extant work on prediction of banking crises has utilised global samples, which are in turn dominated by observations from middle-income countries, and rely on a single estimator, while a range of specifications is desirable to check robustness. However, economic and financial structure as well as the pattern of shocks may differ substantially across regions. Accordingly, in this paper we test the implicit pooling assumption in earlier work on Early Warning Systems using the widest range of models, by estimating logit, signal extraction and binary recursive tree specifications separately for crises in Asia and Latin America, as well as the pooled sample. Results suggest markedly different crisis determinants across regions, implying global samples are inappropriate

Financial liberalization and capital adequacy in models of financial crises

We characterize the effects of financial liberalization indices on OECD banking crises, controlling for the standard macro prudential variables that prevail in the current literature. We use the Fraser Institute’s Economic Freedom of the World database. This yields a variable that captures credit market regulations which broadly measures the restrictions under which banks operate. We then test for the direct impacts of some of its components, deposit interest rate regulations and private sector credit controls, on crisis probabilities and their indirect effects via capital adequacy. Over the period 1980 – 2012, we find that less regulated markets are associated with a lower crisis frequency, and it appears that the channel comes through strengthening the defence that capital provides. Deposit interest rate liberalisation adds to the strength of capital in protecting against crises. However, private sector credit liberalisation, appears to increase the probability of having a crisis, albeit not significantly. If policy makers are concerned about the costs of low risk events, they may wish to control private sector credit even if it has a probability of affecting significantly crises of between 10 and 20 per cent

Dirac Gauginos and the 125 GeV Higgs

We investigate the mass, production and branching ratios of a 125 GeV Higgs in models with Dirac gaugino masses. We give a discussion of naturalness, and describe how deviations from the Standard Model in the key Higgs search channels can be simply obtained. We then perform parameter scans using a SARAH package upgrade, which produces SPheno code that calculates all relevant quantities, including electroweak precision and flavour constraint data, to a level of accuracy previously impossible for this class of models. We study three different variations on the minimal Dirac gaugino extension of the (N)MSSM.Comment: 32 pages, 9 figure

Minimal constrained superfields and the Fayet-Iliopoulos model

We show how the necessary constraints to project out all the components of a chiral superfield except for some scalar degrees of freedom originate from simple operators in the microscopic theory. This is in particular useful in constructing the simplest models of a goldstone boson/inflaton; or extracting the Standard Model Higgs doublet from a supersymmetric electroweak sector. We use the Fayet-Iliopoulos model as an example of the origin for the supersymmetry breaking. We consider the regime where both gauge symmetry and supersymmetry are spontaneously broken, leaving (in the decoupling limit) the goldstino as the only light mode in this sector. We show in three different ways, both in components and in superspace language, how the nilpotent goldstino superfield emerges. We then use it to write different effective operators and extract some of the consequences for the low energy spectrum.Comment: 17 pages. References added. Published versio