Early warning systems and systemic banking crises in low income countries: A multinomial logit approach

Giovanni Caggiano, Pietro Calice and Leone Leonida

Journal of Banking & Finance, 2014, vol. 47, issue C, 258-269

Abstract: This paper estimates an early warning system (EWS) for predicting systemic banking crises in a sample of low income countries in Sub-Saharan Africa. Since the average duration of crises in this sample of countries is longer than one year, the predictive performance of standard binomial logit models is likely to be hampered by the so-called crisis duration bias. The bias arises from the decision to either treat crisis years after the onset of a crisis as non-crisis years or remove them altogether from the model. To overcome this potential drawback, we propose a multinomial logit approach, which is shown to improve the predictive power of our EWS compared to the binomial logit model. Our results suggest that crisis events in low income countries are associated with low economic growth, drying up of banking system liquidity and widening of foreign exchange net open positions.

Keywords: Banking crises; Systemic risk; Early warning systems; Low income countries; Sub-Saharan Africa; Logit estimation; Financial regulation (search for similar items in EconPapers)
JEL-codes: C52 E58 G21 G28 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (69)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:47:y:2014:i:c:p:258-269

DOI: 10.1016/j.jbankfin.2014.07.002

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