Research Discussion Papers, Bank of Finland
No 6/2001:
The role of macroeconomic shocks in banking crises
Jarmo Pesola ()
Abstract: The macroeconomic reasons for the recent banking crises in
the Nordic countries are analysed using an econometric model estimated with
panel data from the 1980s and 1990s. Two alternative dependent variables
are used: the ratio of banks’ loan losses to lending and enterprise
bankruptcies per capita. The explanatory variables are the lagged dependent
variable, lagged percentage change in GDP, an income surprise variable
combined with lagged aggregate indebtedness, a real interest rate surprise
variable combined with lagged aggregate indebtedness, and a deregulation
dummy. The innovation in this paper is the use of surprise variables based
on macroeconomic forecasts. According to the results, high indebtedness
combined with negative macroeconomic surprises contributed to the recent
banking crises in Sweden, Norway and Finland. Also the effects of the
preceding financial liberalization and lending boom on bankruptcies and
loan losses can be traced in the results. The econometric testing did not
indicate direct effects of the exchange rate or the terms of trade on the
banking crises. Denmark did not suffer a banking crisis because the
macroeconomic surprises were smaller there and the initial debt burden was
lighter than in the other Nordic countries. This was the result of, among
other things, earlier financial deregulation, which was conducted in a
fairly balanced way, and a different economic policy regime, as Denmark
belonged to the ERM.
Keywords: financial deregulation; indebtedness; shock; loan loss; banking crisis; (follow links to similar papers)
64 pages, April 18, 2001
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