Bank failures and banking system crises can have very painful effects. Developing basic indicators that provide early warnings of incipient banking crises, therefore, is an essential step in improving countries’ abilities to manage their financial sectors and their economies.
DURING the past two decades, many countries have experienced significant financial sector distress. Perhaps the most acute bouts were brought about by the financial problems encountered in some emerging markets. The banking system problems that began in the mid-1990s in some Asian countries (including Indonesia, Korea, and Thailand) have also made apparent the possibility of regional contagion. In Latin America, severe banking crises occurred in Chile and Colombia during the 1980s, and in Mexico and Venezuela during the first half of the 1990s. Banking crises, however, do not occur only in emerging economies. Episodes of profound banking system distress occurred in the United States during the mid-1980s and early 1990s, in the Nordic countries during the early 1990s, and more recently in Japan. Finding basic indicators that can provide early warnings of incipient banking crises and understanding their dynamics are critical, particularly in the current context of financial globalization.