Banking crises in Europe: the importance of region - specific early warning models

Abstract

Banking crises, albeit rare, can have nefarious consequences. As such, it is relevant to understand not only what factors cause these crises, but what variables can be used in their early detection. Economic integration still requires country speci cities to be considered in macro-prudential monitoring. This project explores the dynamics of banking crises, the role of economic and stock market growth as warning variables for several European regions. Dynamic probit models are used in a panel dataset. Results show that real GDP, stock market growth and house price growth are good indicators of crisis, and separate models for regions within the Eurozone predict crisis more accurately.