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Title: Financial liberalization and capital adequacy in models of financial crises
Authors: Barrell, R
Karim, D
Ventouri, A
Keywords: Banking crises;Logit;Current account;Financial liberalisation
Issue Date: 2013
Publisher: Brunel University
Citation: Economics and Finance Working Paper, Brunel University: 13-06, Mar 2013
Abstract: We characterize the effects of financial liberalization indices on OECD banking crises, controlling for the standard macro prudential variables that prevail in the current literature. We use the Fraser Institute’s Economic Freedom of the World database. This yields a variable that captures credit market regulations which broadly measures the restrictions under which banks operate. We then test for the direct impacts of some of its components, deposit interest rate regulations and private sector credit controls, on crisis probabilities and their indirect effects via capital adequacy. Over the period 1980 – 2012, we find that less regulated markets are associated with a lower crisis frequency, and it appears that the channel comes through strengthening the defence that capital provides. Deposit interest rate liberalisation adds to the strength of capital in protecting against crises. However, private sector credit liberalisation, appears to increase the probability of having a crisis, albeit not significantly. If policy makers are concerned about the costs of low risk events, they may wish to control private sector credit even if it has a probability of affecting significantly crises of between 10 and 20 per cent.
Appears in Collections:Economics and Finance
Dept of Economics and Finance Research Papers

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