Research On Banking Stability Under International Short-term Capital Flows

Since the 1990s, global capital flows, especially short-term capital movements around the world have been more and more frequent and have a growing impact on the banking sector of a country. Throughout the history of several recent financial crises in emerging countries, we may conclude that the primary causal factor was macroeconomic. However, international short-term capital movement and banking sector instability were far more significant than economic forces in triggering and magnifying these crises. Therefore it is vital as well as necessary to make deep research into the relationship between global short-term capital flows and the banking sector stability.First, we define the concept of "International short-term capital flows" as well as "banking stability", and systematically sorts out and reviews the relevant literatures. Second, based on the briefly review of the three generations of currency crisis models, we make a deep theoretical study about the impact of global short-term capital flows to banking stability by using several countries involved in the Asian Financial Crisis as examples. Then, we make an empirical analysis. Based on data of the five major Asian emerging economies-India, Indonesia, Malaysia, Philippines and Thailand, from 1990 to 2010, we build a multivariate logit model.The study shows that, banking deposit, banking cash reserves/banking assets, credit to non-government sectors, exchange rate, CA/GDP, M2/reserves seem the most plausible explanations for banking crises under the background of global short-term capital movements. Besides, the exchange rate has the most significant margin effect. The early warning system built by these seven factors can correctly predicted 91.92 per cent of banking crises.