Can Contemporary Banking Sector Soundness Measures Proxy for Financial Sector Stability and Risk in Developing Countries Pre-Financial Crisis and Mid-Financial Crisis? Open Access
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The impact and cost of the recent global financial crisis of 2007+ was staggering when compared to previous financial crisis. One of the critical repercussions was loss of public and investor confidence in the soundness and stability of large, too big to fail, global commercial banks. There is confusion surrounding what constitutes a healthy bank in the aftermath of 2007+ financial crisis. The current need to quantify, measure, evaluate, and compare (i.e. bank soundness measures) in order to spot troubled banks and "bad and risky" behavior to prevent future financial crisis has taken on a new urgency as vast amounts of capital flows (over $1 trillion) are being redirected to emerging markets. This study differs from existing methods in the literature as it will entail designing, constructing, and validating a composite index of banking sector soundness specifically for developing country banks at the country level with regional and systemic differentials taken into account (not just performance based). The primary objective of this dissertation is to evaluate whether contemporary banking soundness measures at the country level can proxy for financial sector stability and risk in developing countries for the pre-financial crisis and mid-financial crisis time period. This initial report measures 2001/2002 and 2008/2009 data sets on pre and mid financial crisis while the final objective of the long-term initiative is to have annual data from 2001 2010. Such measures also serve as early warning indicators of the overall health of the financial sector in these developing countries and, thus, ultimately impact economic growth.