Net External Position, Financial Development, and Banking Crisis
Title: |
Net External Position, Financial Development, and Banking Crisis |
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Number: |
18/14 |
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Author(s): |
Aytül Ganioğlu |
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Language: |
English |
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Date: |
October 2018 |
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Abstract: |
Does the external position of a country that is conditioned on financial development impact the likelihood of a systemic banking crisis? We address this question using data from 149 developing and advanced countries from 1970 to 2011, as well as a variety of statistical tools. Our findings are twofold. First, we find that the net external position of a country significantly affects its likelihood of a systemic crisis depending on the level of financial development. Conditional on low to moderate financial development, countries can lower the risk of banking crises significantly by maintaining a net foreign creditor status. Second, we find that the level of financial development raises a country’s crisis risk significantly while its impact depends on the net asset position. This indicates a potential amplification effect in which countries with more developed and complex financial systems that are also debtor countries have a higher potential of incurring a systemic banking crisis. |
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Keywords: |
Banking crisis, Net external position, Financial development, Probit |
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JEL Codes: |
E44; F34; G15; H63 |