Banking crises in OECD countries: investigating the role of nonperforming loans, the equity multiplier, banking concentration and stock market capitalisation

Abstract

Early warning systems (EWS) for banking crises traditionally have omitted bank capital, bank liquidity and property prices, with the notable exception being Barrell et al (2010a) . This dissertation expands from that paper using a sample of 25 OECD countries and data from 1987-2017. We develop a baseline model, finding strong effects for M2/Reserves, liquidity and property price growth while bank capital adequacy is insignificant, unlike Barrell et al (2010a). We then add four variables one by one to the baseline to end up at our final specification. Our final specification suggests that alongside external vulnerability (M2/Reserves) and property price growth, stock market capitalisation has a marked effect on the likelihood of a systemic banking crisis. Interestingly, other additional variables tested including nonperforming loans, the equity multiplier ratio and banking concentration are not significant early warning indicators. As a result, it is essential that regulators consider vulnerabilities within markets, stock and real estate alike and control their contributions to systemic episodes.