Banking Crises: Prediction, Policy Implementation and Responses

The events of the 1990s, which led to the collapse of the banking sector in many countries around the world, have renewed the need to devise some preventive policies. However, the success of these preventive measures is contingent on the predictability of the crisis both in nature and extent. This paper attempts to address these issues using data from Indonesia. The results suggest that the main determinants of the banking crisis in Indonesia were extensive non-guaranteed credit extension, squeeze in banking sector liquidity and overvalued foreign exchange. The results also identify the factors that may influence the probability of the occurrence of crisis. The paper is then extended to investigate the responsiveness of alternative policy measures to reduce the impact of a forthcoming crisis.