8/2005 Kadri Männasoo and David G Mayes. Investigating the early signals of banking sector vulnerabilities in Central and Eastern European emerging markets

Working Papers of Eesti Pank. No 8, 2005

This paper considers the joint role of macro-economic and bankspecific factors in explaining the occurrence of banking problems in the twenty-one Central and East European emerging markets over the recent decade. Using data at the individual bank level we show, using a logit model, that the macroeconomic factors play a central role in determining banking sector instability in the early stages of difficulty, while the bankspecific factors are more important in the later stages and gain more weight as the banking sector develops and the institutional framework becomes mature.
JEL Code: E44, G21
Keywords: banking sector vulnerability, banking crises, early warning indicators, Central and Eastern Europe

Authors' e-mail addresses: Kadri.Mannasoo [at] epbe.ee, David.Mayes [at] bof.fi

The views expressed are those of the authors and do not necessarily represent the official views of Eesti Pank.

Contents

1. Introduction
2. Framework for Addressing the Problem
3. Specification of the Model
3.1. Definition of Banking Crisis or Bank Distress
3.2. Early Warning Indicators
4. Empirical Study
4.1. Data
4.2. Model Specification
5. Results
6. Conclusions
References
Appendices
Appendix 1. Crisis episodes by number of banks and proportional to banks' number and banking sector's total assets
Appendix 2. Crisis episodes 1996-2003 grouped by countries
Appendix 3. Mean level of warning indicators for sound (0) and unsound (1) banks in country comparison

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