The financial liberalization in the four Nordic countries (Denmark, Finland, Norway, and Sweden) that took place mostly in the 1980s led to a major financial crisis in three of those countries. The crises in Finland, Norway, and Sweden are among the deepest financial crises in advanced market...

We study the adverse selection problem in imperfectly competitive credit markets and illustrate the circumstances where a separating equilibrium emerges, even without collateral. The borrowers are heterogeneous in their preferences concerning the banks. Separation obtains in market segments...

The controversy over whether investment-cash flow sensitivity is a good indicator of financing constraints is still unresolved. We tackle it from several different angles and cross-validate our analysis with both balance sheet and qualitative data on self-declared credit rationing and financing...

We consider the joint effect of competition and deposit insurance on risk taking by banks when the riskiness of banks is unobservable to depositors. It turns out that the magnitude of risk taking depends on the type of bank competition. If the bank is a monopoly or banks compete only in the loan...

Consider a competitive bank whose illiquid asset portfolio is funded by short-term debt that has to be refinanced before the asset matures. We show that in this setting maximal transparency is not socially optimal, and that the existence of social externalities of bank failures further lowers...

The banking system is known to be vulnerable to self-fulfilling crises that are caused by depositors’ coordination failure. We show that transparency regulation may prevent certain types of systemic crises by eliminating the possibility of the coordination failure.

This discussion paper presents a microsimulation model of household distress. We use logit analysis to estimate the extent to which a household’s risk of being financially distressed depends on net income after tax and loan servicing costs. The impact of assumed macroeconomic shocks on this...

We suggest a complementary tool for financial stability analysis based on stochastic simulation of a dynamic stochastic general equilibrium model (DSGE) of the macro economy. The paper relates to financial stability research in which financial aggregates crucial to financial stability are...

Systemic bank problems arise for a large number of causes and in spite of both active banking supervision and market discipline. Once a problem has emerged, swift action is needed to limit further losses, avoid financial destabilization, and regain efficient markets. The restructuring exercise...

This paper presents first steps toward robust early-warning models. We conduct a horse race of conventional statistical methods and more recent machine learning methods. As early-warning models based upon one approach are oftentimes built in isolation of other methods, the exercise is of high...