Evaluating off-balance sheet exposures in banking crisis determination models

Pub. Date
09 July, 2010
Pub. Type

Given the evident effect that banks' off-balance sheet activity has had on systemic vulnerability in the sub-prime crisis, we test for a consistent impact of off-balance sheet exposures on the probability of banking crises in OECD countries since 1980. Variables capturing off-balance sheet activity have been neglected in most early warning models to date, mainly due to the lack of the data. We find that the change in a proxy of off-balance sheet activity of banks derived from the share of non-interest income is significant in a parsimonious logit model also featuring bank capital adequacy, liquidity, changes in house prices and the current account balance to GDP ratio. We consider it essential that regulators take into account the results for the above proxy in regulating off-balance sheet exposures and controlling their contribution to systemic risk.