The Market’s View on the Probability of Banking Sector Failure: Cross-Country Comparisons

Hans Byström

No 2003:2, Working Papers from Lund University, Department of Economics

Abstract: Considering the increasingly international banks of today, the health ofa country’s banking sector is crucial not only to the country’s growthand prosperity but also to the rest of the international financialcommunity. Early warning signals of a banking sector in trouble or apending banking crisis would therefore be of great value to both banks,investors and banking regulators/supervisors world wide. Di.erentwarning signals exist and in this paper we investigate how the stockmarket can provide a market-based indicator of banking sector health.Hall and Miles (1990) suggests an approach of estimating defaultprobabilities of individual banks using only their stock marketvaluations and volatilities. In this paper we apply an aggregatedversion of their approach to banking sectors around the world in bothdeveloped and emerging economies and study the market’s assessment ofthe probability of systemic banking crises in these countries over thelast decade, including the Asian Crisis 1997-98. In addition, weinvestigate whether there is a relationship between the probability ofbanking sector failure and institutional/structural features of theactual banking sector. The quality of governance and the degree of lawand order in a country is found to be significantly negatively relatedto the market based failure probabilities as is an explicit depositinsurance during periods of crisis. Keywords: banking sector; bankingcrisis; default probability; market discipline

Keywords: banking sector; banking crisis; default probability; market discipline (search for similar items in EconPapers)
JEL-codes: C32 G14 G21 G33 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2003-03-11
New Economics Papers: this item is included in nep-cfn, nep-fmk and nep-rmg
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Published in Journal of International Financial Markets, Institutions and Money, 2004, pages 419-438.

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Related works:
Journal Article: The market's view on the probability of banking sector failure: cross-country comparisons (2004)
Working Paper: The Market's View on the Probability of Banking Sector Failure: Cross-Country Comparisons (2003)
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