Luận văn thạc sĩ UEH macroeconomic, financial and institutional determinants of banking crisis, the

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY THE HAGUE

VIETNAM THE NETHERLANDS

VIETNAM - NETHERLANDS

PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

MACROECONOMIC, FINANCIAL AND INSTITUTIONAL

DETERMINANTS OF BANKING CRISIS:

THE MONEY MARKET PRESSURE INDEX APPROACH

A thesis submitted in partial fulfilment of the requirements for the degree of

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By

CHAU THE VINH

Academic Supervisor:

Assoc. Prof. NGUYEN TRONG HOAI

HO CHI MINH CITY, December2014

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CERTIFICATION

“I certify that the substance of this thesis has not already been submitted for any

degree and has not been currently submitted for any other degree.

I certify that to the best of my knowledge and help received in preparing this thesis

and all used sources have acknowledged in this dissertation”.

CHAU THE VINH

Date: 31st December 2014

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ACKNOWLEDGEMENT

Upon completing this thesis, I have received a great deal of encouragement and

support from many people.

First of all, I would like to express my deepest gratitude towards Assoc. Prof.

Nguyen Trong Hoai, my esteemed academic supervisor, for his patient guidance,

encouragement and valuable critiques for my research work.

Also, I would like to thank Dr. Truong Dang Thuy for his guidance and advice in

econometric techniques, Dr. Pham Khanh Nam for his encouragement and valuable

advice in the starting phase of my thesis research design.

My gratefulness is also extended to all of my lecturers and staffs of the Vietnam￾Netherlands Program for their assistance during my first days in this programme.

Besides, I would love to thank my parents and my families for their ceaseless

encouragement and support during my study period. Moreover, my special thanks

to my C.E.O – Mr. Nguyen Huu Tram, who understands and gives me approval for

my long personal leave to finalize my thesis on time. Without them, I would not

have opportunities and incentives to have my thesis finished.

Finally, I would like to thank all my friends and other people who have had any

help and support for my thesis but are not above-mentioned.

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ABSTRACT

The thesis estimates a logit regression model by fixed effect with a combination of

some macroeconomic and financial indicators from the work of Hagen and Ho

(2007) and Worldwide Governance Indicators (WGI) from the updated database of

Kaufmann (2013) as explanatory variables for binary dependent variable banking

crises generated from the approach of money market pressure index (Hagen and Ho,

2007). The monthly panel dataset, which is available in full range and easy of

approach from International Financial Statistics CD-ROM (2011), of 18 countries

from Latin America and Asian over the scope of 2001 – 2010is applied. Some

specific lag lengths of indicators are also applied according to the suggestion of

“flexibility in forecast horizon” of Drehmann et al. (2011).

The crisis phenomenon of banking system seems to be well-described in light of the

present of depreciation, former year crisis, high real interest rate in prior of 36

months, growth of credit to GDP in prior 12 months. Moreover, impact of inflation

seems to support the school of thought that it is negative effect to crisis.

Simultaneously, growth rate of bank deposits to GDP is likely useful to prevent

banking systems from profitability risks exposure that leads to banking crisis

probability. However, unfortunately, the indicators of growth of monetary base and

growth of M2 to reserves give incorrect expected sign and negligible effect on

banking crisis. Furthermore, the included institutional variables from WGI give

insignificant statistic meaning. Hence, another set of institutional indicators such as

that from International Country Risk Guide (ICRG) should be considered in future

analysis to test for the relationship between Government health and banking crisis

probability.

Despite, on one hand, there should be a more adequate research to be examined in

the future, this thesis attempts to contribute so-called new updates information on

the would-be banking crisis determinants. Nevertheless, on the other hand, there is

likely no proper explanation on the tranquil periods of banking system. Hence, it is

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suggested that thereshould be some assessment ofsuch time of banking system,

which over a long time has beenneglected (Kauko, 2014).

Key words: banking crisis, tranquiltime, determinants, institutional indicators, fixed

effect logitregression.

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TABLE OF CONTENTS

CHAPTER 1: INTRODUCTION .................................................................................................1

1.1. Problem statement.........................................................................................................1

1.2. Research objective ........................................................................................................3

1.3. Research question..........................................................................................................3

1.4. Structure of the thesis....................................................................................................3

CHAPTER 2: LITERATURE REVIEW ......................................................................................5

2.1. Defining banking crisis.................................................................................................5

2.2. Trends of banking crises researchtogether with crises mechanism...............................7

2.2.1. The first trend............................................................................................................8

2.2.2. The second trend .....................................................................................................10

2.2.3. The third trend.........................................................................................................14

2.3. Money Market Pressure (MMP) Index (Hagen and Ho, 2007)...................................19

2.4. Chapter summary ........................................................................................................21

CHAPTER 3: METHODOLOGY, MODEL SPECIFICATION AND DATA..........................28

3.1. Model selection ...........................................................................................................28

3.2. Model specification.....................................................................................................31

3.2.1. Macroeconomic indicators......................................................................................33

3.2.2. Financial indicators.................................................................................................34

3.2.3. Institutional indicators.............................................................................................36

3.2.4. Use of lagged terms.................................................................................................37

3.3. Estimation strategies and relevant model diagnostics.................................................40

3.3.1. Calculation of MMP for banking crisis assessment ................................................40

3.3.2. Model estimation steps and diagnostics..................................................................41

3.4. Data scope and sources ...............................................................................................43

3.5. Conceptual framework ................................................................................................46

3.6. Research Process.........................................................................................................47

CHAPTER 4: RESUTLS AND FINDINGS...............................................................................48

4.1. Descriptive statistics of explanatory indicators...........................................................48

4.2. Statistical tests for model ............................................................................................51

4.2.1. Model specification test ..........................................................................................51

4.1.2. Goodness of fit test..................................................................................................51

4.1.3. Test for multicollinearity.........................................................................................51

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4.3. Coefficients interpretation...........................................................................................53

4.3.1. Macroeconomic indicators......................................................................................53

4.3.2. Financial indicators.................................................................................................55

4.3.3. Institutional indicators.............................................................................................57

CHAPTER 5: CONCLUSION, POLICY RECOMMENDATION AND LIMITATION..........58

5.1. Conclusion ..................................................................................................................58

5.2. Policy recommendation...............................................................................................58

5.3. Limitation of the research ...........................................................................................60

REFERENCES............................................................................................................................61

APPENDICES ............................................................................................................................65

Table 2.1 Summary of literature reviewed..............................................................................22

Figure 2.1 Mechanisms of banking crisis................................................................................27

Table 3.1 Data for MMP index calculation.............................................................................44

Table 3.2 Data and sources of explanatory variables..............................................................45

Table 4.1 Banking crisis dates retrieved from MMP index ....................................................65

Table 4.2 Summary statistics of variables used in the regression ...........................................49

Table 4.3a The correlation on the sample observations..........................................................50

Table 4.3b The correlation on the sample observations..........................................................50

Table 4.4Linktest for specification error of logit model .........................................................66

Table 4.5 Goodness of fit test of model ..................................................................................67

Tabel 4.6 Full model multicollinearity test result ...................................................................67

Table 4.7 Dropping significantly high correlated variables GE, RL: .....................................68

Table 4.8 Dropping high correlated variables GE, RL and CC ..............................................68

Table 4.9 Using interactive term of GE and RL .....................................................................69

Table 4.10 Full model .............................................................................................................69

Table 4.11 Restricted model without GE, RL, CC..................................................................70

Table 4.12 Fixed effect model with lags.................................................................................70

Table 4.13 Random effect model with lags.............................................................................71

Table 4.14 Simple logit model with lags ................................................................................72

Table 4.15Comparison of lagged terms of indicators in simple logit, FEM and REM...........73

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ABBREVIATION

MMP: Money Market Pressure

WGI: World Governance Indicator

WB: World Bank

IMF: International Monetary Fund

IFS: International Financial Statistics

ICRG: International Country Risks Guide

FEM: Fixed Effect Model

REM: Random Effect Model

BC: Banking Crisis

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