AN Analysis of The Determinants of The Banking Crises in The Southern African Development Community(SADC)

Abstract 

This study analysed the determinants of banking crises in the SADC region for the period 1985-2011. The probability of a banking crisis was estimated using a multinomial logit model on real GDP growth level, terms of trade, the ratio of private domestic credit to GDP and the ratio of M2 to foreign exchange reserves. The model was estimated for the pooled, non-systemic and systemic crises economies in order to determine if the impact of the determinants differs between systemic and non-systemic crises. This study found that the impact of the determinants differs between systemic and non-systemic crises as well as between one year prior to a crisis and the year when the crisis starts. Real GDP growth rate was found to be the leading indicator of banking crises one year prior to the start of a crisis for the pooled, non-systemic and systemic crises economies. The ratio of private domestic credit to GDP was found to be significant in explaining the start of a banking crisis in a pooled model. As the ratio of domestic credit to private sector to GDP increases by 1 unit, the likelihood of start of a banking crisis is 0.01 percent higher which is in line with theory and findings by other researchers. This finding remained robust for the systemic banking crises economies. However, none of these macro-economic and financial variables were found significant in explaining the start of a non-systemic crisis.