Topic 3 Financial Crises (Types And Indicators Of Crises) Flashcards
2007-2008 Crisis only crisis comparable to Great Depression. (1930s)
2007-08 characteristics (2)
Fall in GDP (consumption and investment)
Increased unemployment
2 types of crises
Financial
Economic
Financial crises definition
Financial institutions or assets suddenly lose a large part of their NOMINAL value e.g stock price
Important idea on financial crises’
Don’t necessarily have macroeconomic effects, but can lead to economic crises with REAL effects
Economic crises/recessions characteristics (2)
REAL effects on indicators e.g GDP, unemployment.
Long time to recover
Indicators associated to financial crises (3)
Deposit insurance
Bank capital to assets ratio
Non-performing loans to total gross loans ratio
Deposit insurance- what is its variable type?
Dummy variable
1 if country has deposit insurance
0 if not
Expected negative impact on probability of crisis (equation)
P(FC)= a+β₁D1+ε
β₁ is expected to be negative (coefficient)
D1 is the dummy variable (deposit scheme)
P(FC) probability of a financial crisis
Difference between a country with DI vs D0 should be 0.5
Deposit insurance trends across countries
Increasing (in lower income countries the most)
Bank capital-to-asset ratio definition
Money in the bank (bank capital) compared to total assets
Expected negative impact on the probability of crisis (equation)
P(FC)= a+β₁BK+ε
β₁ is expected to be negative
BK(bank capital-to-asset ratio)
What is the bank capital-to-asset ratio (BK) minimum?
Basel accords; BK minimum is 8%
Non-performing loans to total gross loans ratio definition.
(Non-performing loans are loans late or unlikely to be repaid in full-BAD!)
Proportion of non-performing loans out of total loans
Expected positive impact on the probability of crisis
P(FC)=a+β₁NPL+ε
β₁ is expected to be positive
