Banking Sector Fragility and Systemic Sources of Fragility

Brenda Gonzalez-Hermosillo

No 1996/012, IMF Working Papers from International Monetary Fund

Abstract: A theoretical framework to assess the degree of fragility or, inversely, the soundness of the banking system is proposed. It is argued that, while a bank may be either solvent or insolvent at any given time, its degree of fragility must be a forward-looking measure based on the probability that it can withstand a destabilizing shock. Externalities are particularly important because they can constitute a serious source of systemic risk. The factors that determine banks’ soundness can be separated into bank-specific and those common to all banks (subject to microprudential and macroprudential considerations, respectively). The interconnection between banking crises and currency crises (in both directions) is also discussed.

Keywords: WP; bank failure; risk control management system; balance sheet; bank portfolio; balance sheet data; deposit guarantee; bank regulator; net asset income; bank assets; Banking crises; Commercial banks; Distressed institutions; Currency crises (search for similar items in EconPapers)
Pages: 42
Date: 1996-02-01
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Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:1996/012

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