FINANCIAL SOUNDNESS INDICATORS AND FINANCIAL CRISIS EPISODES
Maria Th. Kasselaki
Athanasios O. Tagkalakis
Bank of Greece
This paper studies the links between financial soundness indicators and financial crisis episodes controlling for several macroeconomic and fiscal variables in 20 OECD countries. We focus our attention on aggregate capital adequacy, asset quality and bank profitability indicators compiled by the IMF. Our key findings suggest that, in times of severe financial crisis, regulatory capital to risk weighted assets increases (by about 0.5-0.6 percentage points –p.p.) to abide by regulatory and supervisory demands, non performing loans (NPL) to total loans increase dramatically (by about 0.5-0.6 p.p.), but loan loss provisions lag behind NPLs (they fall by about 12.3-18.8 p.p.) and profitability deteriorates dramatically (returns on assets (equity) fall by about 0.3-0.4 (5.0-7.0) p.p.).
Keywords: Bank profitability, capital adequacy, asset quality, financial crisis.
JEL classification: E44, E58, G21, G28, E61, E62, H61, H62, E32.
Acknowledgments: We would like to thank Anne Villamil for useful comments and suggestions. The views of the paper are our own and do not necessarily reflect those of the Bank of Greece. All remaining errors are ours.
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