External Liabilities, Domestic Institutions and Banking Crises in Developing Economies

Boukef Jlassi, Nabila and Hamdi, Helmi and Joyce, Joseph (2016): External Liabilities, Domestic Institutions and Banking Crises in Developing Economies. Forthcoming in: Review of International Economics

Abstract

We investigate the impact of foreign equity and debt on the occurrence of banking crises in 61 lower-income and middle-income economies during the 1984-2010 period. We also focus on the effects of domestic institutions on banking crises and whether they mitigate or exacerbate the impact of the external liabilities. We find that FDI liabilities lower the probability of a crisis, while debt liabilities increase their incidence. However, institutions that lower financial or political risk partially offset the impact of debt liabilities, as does government stability. A decrease in investment risk directly reduces the incidence of banking crises.

• Item Type: MPRA Paper
• Language: English
• Keywords: banking crises, FDI, portfolio, debt, institutions
• Subjects: F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements; F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

Ahrend, Rudier and Antoine Goujard. 2014. “Drivers of Systemic Banking Crises: The Role of Financial Account Structure and Financial Integration.” International Finance 17(3), 135-160.

Alfaro, Laura and Maggie Xiaoyang Chen. 2012). “Surviving the Global Financial Crisis: Foreign Ownership and Establishment Performance.” American Economic Journal: Economic Policy 4(3), 30-55.

Angkinand, Apanard P., Wanvimol Sawangngoenyuang and Clas Wihlborg. 2010. “Financial Liberalization and Banking Crises: A Cross-Country Analysis.” International Review of Finance 10(2), 263-292.

Angkinand, Angkinand P. and Thomas D. Willett. 2011. “Exchange Rate Regimes and Banking Crises: The Channels of Influence Investigated.” International Journal of Finance and Economics 16(3), 256-274.

Bénassy-Quéré, Agnès, Maylis Coupet and Thierry Mayer. 2007. “Institutional Determinants of Foreign Direct Investment.” The World Economy 30(5), 764-782.

Bordo, Michael, Barry Eichengreen, Daniela Klingebiel, and Maria Soleded Martinez-Peria. 2001. “Is the Crisis Problem Growing More Severe?” Economic Policy 16(32), 52-82.

Boyd, John, Gianni De Nicolò and Elena Loukoianova. 2009. “Banking Crises and Crisis Dating: Theory and Evidence.” IMF Working Paper No. 09/141, Washington, DC.

Broner, Fernando, Tatiana Didier, Aitor Erce and Sergio L. Schmukler. 2013. “Gross Capital Flows: Dynamics and Crises.” Journal of Monetary Economics 60(1), 113-133.

Chang, Roberto and Andres Velasco. 2001. “A Model of Financial Crises in Emerging Markets.” Quarterly Journal of Economics 116(2), 489-517.

Chinn, Menzie D. and Hiro Ito. 2006. “What Matters for Financial Development? Capital Controls, Institutions, and Interactions. Journal of Development Economics 81(1), 163-192.

Claessesn, Stijn, Daniela Klingebiel and Luc Laeven. 2004. “Resolving Systemic Financial Crises: Policies and Institutions.” World Bank Policy Research Paper No. 3377, Washington. DC.

Daniel, Betty C. and John Bailey Jones. 2007. “Financial Liberalization and Banking Crises in Emerging Economies.” Journal of International Economics 72(1), 202-221.

Demirgüç-Kunt, Asli and Enrica Detragiache. 1998. “The Determinants of Banking Crises in Developing and Developed Countries.” IMF Staff Papers 45(1), 81-109.

Demirgüç-Kunt, Asli and Enrica Detragiache. 2001. “Financial Liberalization and Financial Fragility.” In Gerard Caprio, Patrick Honohan and Joseph E. Stiglitz (eds.), Financial Liberalization: How Far. How Fast? Cambridge, UK, Cambridge University Press, 96-122.

Duttagupta, Rupa and Paul Cashin. 2011. “Anatomy of Banking Crises in Developing and Emerging Market Countries.” Journal of International Money and Finance, 30(2) 354-376.

Eichengreen, Barry and Carlos Arteta. 2002. “Banking Crises in Emerging Markets: Presumptions and Evidence.” In Mario Blejer and Marko Skreb (eds.), Financial Policies in Emerging Markets. Cambridge, MA: MIT Press, 47-94.

Eichengreen, Barry and Andrew K. Rose (2001). “Staying Afloat When the Wind Shifts: External Factors and Emerging-Market Banking Crises.” In Guillermo A. Calvo, Rudiger Dornbusch and Maurice Obstfeld (eds.), Money, Capital Mobility & Trade: Essays in honor of Robert A. Mundell. Cambridge, MA: MIT Press, 171-205.

Forbes, Kritsin J. and Francis E. Warnock. 2012. “Capital Flow Waves: Surges, Stops, Flight, and Retrenchment.” Journal of International Economics 88(2), 235-51.

Furceri, David, Stéphanie Guichard and Elena Rusticelli. 2012. “Episodes of Large Capital Inflows, Banking and Currency Crises, and Sudden Stops.” International Finance 15(1), 1-35.

Hamdi, Helmi and Nabila Boukef Jlassi. 2014. “Financial Liberalization. Disaggregated Capital Flows and Banking Crisis: Evidence from Developing Countries.” Economic Modelling 41, 124-132.

International Monetary Fund. 2000. Debt- and Reserve-Related Indicators of External Vulnerability. Washington. DC: IMF.

International Monetary Fund. 2002. Capital Account Liberalization and Financial Sector Stability. Washington. DC: IMF.

Joyce, Joseph P. 2011. “Financial Globalization and Banking Crises in Emerging Markets.” Open Economies Review 22(5), 875-895.

Kaminsky, Graciela L. and Carmen M. Reinhart. 1999. “The Twin Crises: The Causes of Banking and Balance of Payments Problems.” American Economic Review 89(3), 473-500.

Klomp, Jeroen. 2010. Causes of Banking Crises Revisited. North American Journal of Economics and Finance 21(1), 72-87.

Laeven, Luc and Fabian Valencia. 2013. Systemic Banking Crises Database. IMF Economic Review 61(2), 225-270.

Lane, Philip R. and Gian Maria Milesi-Ferretti. 2007. “The External Wealth of Nations II: Extended Estimates of Foreign Assets and Liabilities, 1970-2004.” Journal of International Economics 73(2), 223-250.

Levine, Ross. 1998. “The Legal Environment, Banks, and Long-Run Economic Growth.” Journal of Money, Credit, and Banking 30(3), 596-613.

Noy, Ilan. 2004. “Financial Liberalization. Prudential Supervision, and the Onset of Banking Crises.” Emerging Markets Review 5(3), 341-359. Powell, Andrew and Pilar Tavella. 2015. “Capital Inflow Surges in Emerging Economies: How Worried Should LAC Be?” Economía 15(2), 1-37. Reinhart, Carmen and Kenneth S. Rogoff. 2004. “The Modern History of Exchange Rate Arrangements: A Reinterpretation.” Quarterly Journal of Economics 119(1), 1-48.

Reinhart, Carmen M. and Kenneth S. Rogoff. 2009. This Time Is Different: Eight Centuries of Financial Folly. Princeton. NJ: Princeton University Press.

Rodrik, Dani, Arvind Subramanian and Francesco Trebbi. 2004. “Institutions Rule: The Primacy of Institutions over Geography and Integration in Economic Development.” Journal of Economic Growth 9(2), 131-165.

Rodrik, Dani and Andrés Velasco. 2000. “Short-term Capital Flows.” In Boris Pleskovic and Joseph E. Stiglitz (eds.), Annual World Bank Conference on Development Economics 1999. Washington. DC: World Bank, 59-90.