BANK REGULATION, PROPERTY PRICES AND EARLY WARNING SYSTEMS FOR BANKING CRISES IN OECD COUNTRIES

Existing work on early warning systems (EWS) for banking crises generally omits bank capital, bank liquidity and property prices, despite their relevance to the probability of crisis in the mind of bankers, policymakers and the public. One reason for this neglect is that most work on EWS to date has been for global samples dominated by emerging market crises. For such countries, time series data on bank capital adequacy and property prices are typically absent, while other variables affecting crises may also differ in OECD countries. Accordingly, we estimate logit models of crisis for OECD countries only and find strong effects of capital adequacy, liquidity ratios and property prices, such as to exclude most traditional variables. Our results imply that higher unweighted capital adequacy as well as liquidity ratios has a marked effect on the probability of a banking crisis, implying long run benefits to offset some of the costs that such regulations may impose (e.g. widening of bank spreads).