Annals of the University of Oradea: Economic Science (Jul 2013)
ECONOMIC AND FINANCIAL PERIODS INDUCED THROUGH BANKING SYSTEM
Abstract
Abstract:This paper is an empirical study which analyzes the influence of banking system to the economic and financial environment. At the basis of this research there are two subjective definitions of economic instability periods (CII) and of financial instability periods (FII) and two composite indexes called EWI (Economic Warning Index) and FWI (Financial Warning Index) defined in a prior research. Because it is not possible to predict the exact point in time at which the crisis sets in, the purpose of this paper is to identify possible vulnerabilities induced through banking system and to treat them in order to mitigate the costs of the economy. I defined a set of eighteen potential leading indicators from banking/financial sector, in the period 2000 - 2012. The countries included in the study are Czech Republic, Hungary and Romania. It was composed a balance panel with seven hundred and eighty observations. There is both a quantitative and qualitative approach. Using econometrics technicques as OLS regressions, Fixed effects and Fixed dummy effects there were identfied significant banking indicators in explaining economic and financial instability periods. Then, I compose a banking index which captures the costs occurred to the banking system and I assess its performance in explaining the economic and financial instability indexes through in the sample and out of the sample techniques. At the basis of my decision to choose a continuous model was the fact that it motivates policy makers in steering policy continuously and the fact that there is no need to decide between yes/ no value of crisis. This research aim to observe the influence of the banking sector evolution to the incidence of economic and financial instability periods and give us a warning regardless any negative trends in the macroeconomic or financial activity, affecting the national or the global situation. Using model simulations on historical data, the model performance was assessed upon in the sample and out of sample estimation techniques. The evaluation results suggest that banking indicators give us a warning signal of the negative trend of economic and financial environment.
