Interest rate liberalization and capital adequacy in models of financial crises

Ray Barrell, Dilruba Karim and Alexia Ventouri

Journal of Financial Stability, 2017, vol. 33, issue C, 261-272

Abstract: We characterize the effects of interest rate liberalization 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. We test for the direct impacts of interest rate liberalization on crisis probabilities and their indirect effects via capital adequacy. Over the period 1980–2012, we find that interest rate liberalization has a crises reducing effect, and it appears that the beneficial effects work by strengthening capital buffers. We also show that when controlling for liberalization, capital adequacy and liquidity, the main driver of financial crises is property price growth. Our results are invariant when we control for alternative sensitivity tests for robustness purposes.

Keywords: Banking crises; Logit; Capital adequacy; Interest rate liberalization; Economic freedom indexes (search for similar items in EconPapers)
JEL-codes: C52 E58 G21 G28 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:33:y:2017:i:c:p:261-272

DOI: 10.1016/j.jfs.2016.09.001

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