Financial structure, financial development and banking fragility: International evidence

Ruiz-Porras, Antonio (2008): Financial structure, financial development and banking fragility: International evidence. Forthcoming in: Analisis Economico

Abstract

We study the effects of financial structure and financial development on banking fragility. We develop our study by using fixed-effects panel-data regressions and by controlling the effects of certain banking indicators. We use individual and principal-components indicators of the activity, size and efficiency of intermediaries and markets. The indicators include data for 211 countries between 1990 and 2003. Our main findings suggest that banking stability is enhanced in market-based financial systems. Financial development reduces it. However this fragility-enhancing effect can be unveiled only when we account for financial structure. Thus, financial structure and development jointly matter to assess banking fragility.

• Item Type: MPRA Paper
• Language: English
• Keywords: Banks; fragility; financial structure; financial development
• Subjects: N - Economic History > N2 - Financial Markets and Institutions > N20 - General, International, or Comparative; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

Allen, Franklin, (2001), “Financial structure and financial crisis”, International Review of Finance, 2(1/2), 1-19

Allen, Franklin and Douglas Gale, (2004), “Comparative financial systems: A discussion”, in S. Bhattacharya, A. Boot and A. V. Thakor, eds., Credit Intermediation and the Macroeconomy: Models and Perspectives, (Oxford University Press, Oxford, New York), 699-770

- (2000) Comparing Financial Systems, Cambridge, United States, MIT Press

- (1997) “Financial markets, intermediaries and intertemporal smoothing” Journal of Political Economy, 105(3), 523-546

Allen, Franklin and Anthony M. Santomero (2001), “What do intermediaries do?” Journal of Banking and Finance, 25(2), 271-294

Bagehot, Walter (1873), Lombard Street: A Description of the Money Market, London, United Kingdom, Henry S. King & Co.

Barrel, Ray and E. Philip Davies (2008), “The evolution of the financial crisis of 2007-8”, National Institute Economic Review, 206(1), 5-14

Beck, Thorsten, Demirguc-Kunt, Asli and Ross Levine, (2006), A new database on financial development and structure (1960-2004) [Online]. Washington: World Bank Available at http://econ.worldbank.org . [Revised database: 21 February, 2006]

Caprio, Gerard and Daniela Klingebiel, (2003), Episodes of systemic and borderline financial crises (Datasets 1 and 2) [Online]. Washington: World Bank Available at http://econ.worldbank.org . [Respective publications: 22 January, 2003/ 10 July, 2002]

- (1996), “Bank insolvency: Bad luck, bad policy or bad banking?”, Document prepared for the Annual Bank Conference on Development Economics, April 25-26, 1996 (World Bank)

Carletti, Elena (2008), “Competition and regulation in banking”, in A. Boot and A. V. Thakor, eds., Handbook of Financial Intermediation and Banking, (North Holland, London), 449-482

Cecchetti, Stephen G. (2008), “The subprime series, part 1: Financial crises are not going away”, in A. Felton and C. Reinhart, eds., The First Global Financial Crisis of the 21st Century, (CEPR and VoxEU.org, London), 21-23

De Bandt, Oliver and Philipp Hartmann (2002), “Systemic risk in banking: A survey”, in C. A. E. Goodhart and G. Illing, eds., Financial Crises, Contagion, and the Lender of Last Resort: A Reader, (Oxford University Press, Padstone), 249-297

Demirguc-Kunt, Asli and Enrica Detragiache (2005), “Cross-country empirical studies of systemic bank distress: A survey”, National Institute Economic Review, 192(1), 68-83

- (1998), “The determinants of banking crises in developing and developed countries”, IMF Staff Papers, 45(1), 81-109

Demirguc-Kunt, Asli and Harry Huizinga (2001), “Financial structure and bank profitability”, in A. Demirguc-Kunt and R. Levine, eds., Financial Structure and Economic Growth: A Cross-Country Comparison of Banks, Markets, and Development, (MIT Press, Cambridge), 243-262

Diamond, Douglas W. and Philip H. Dybvig (1983), “Bank runs, deposit insurance, and liquidity”, Journal of Political Economy, 91(3), 401-419

Diaz-Alejandro, Carlos (1985), “Good-bye financial repression, hello financial crash”, Journal of Development Economics, 19(1), 1-24

Evrensel, Ayşe Y., (2008), “Banking crisis and financial structure: A survival-time analysis”, International Review of Economics and Finance, 17(4), 589-602

Felton, Andrew (2008) and Carmen Reinhart, eds. (2008), The First Global Financial Crisis of the 21st Century, London, United Kingdom, Centre for Economic Policy Research (CEPR), VoxEU.org Publication

Fry, Maxwell J. (1995), Money, Interest and Banking in Economic Development, 2ed, Baltimore, United States, Johns Hopkins University Press

IMF, (2008), Global Financial Stability Report October 2008, Washington DC, United States, International Monetary Fund

Levine, Ross (2002), “Bank-based or market-based financial systems: Which is better?”, Journal of Financial Intermediation, 11(4), 398-428

Loayza, Norman V. and Romain Ranciere (2006), “Financial development, financial fragility and growth”, Journal of Money, Credit and Banking, 38(4), 1051-1076

Ndikumana, Léonce (2005) “Financial development, financial structure and domestic investment: International evidence”, Journal of International Money and Finance, 24(4), 651-673

Ruiz-Porras, Antonio (2008), “Banking competition and financial fragility: Evidence from panel-data”, Estudios Económicos, 23(1), 49-87

- (2006), “Financial systems and banking crises: An assessment”, Revista Mexicana de Economía y Finanzas, 5(1), 13-27

Scholtens, Bert and Dick Van Wensveen (2000), “A critique on the theory of financial intermediation” Journal of Banking and Finance, 24(8), 1243-1251

Vives, Xavier (2008), “Bagehot, central banking and the financial crisis”, in A. Felton and C. Reinhart, eds., The First Global Financial Crisis of the 21st Century, (CEPR and VoxEU.org, London), 99-101 Woolridge, Jeffrey M. (2002), Econometric Analysis of Cross Section and Panel Data, Cambridge, United States, MIT Press