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Interest Rate Liberalization and Capital Adequacy in Models of Financial Crises Interest Rate Liberalization and Capital Adequacy in Models of Financial Crises

Ray Barrell, Dilruba Karim, Alexia Ventouri, Ray Barrell, Dilruba Karim, Alexia Ventouri
2015 unpublished

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We characterize the effects of interest rate liberalization on OECD banking crises, controlling for the standard macro prudential variables that prevail in the current literature. We use the Fraser Institute's Economic Freedom of the World database. We test for the direct impacts of interest rate liberalization on crisis probabilities and their indirect effects via capital adequacy. Over the period 1980-2012, we find that interest rate liberalization has a crises reducing effect, and it appears
more » ... that the beneficial effects work by strengthening capital buffers. We also show that when controlling for liberalization, capital adequacy and liquidity, the main driver of financial crises is property price growth. Our results invariant when we control for alternative sensitivity tests for robustness purposes. JEL classification: C52; E58; G21; G28
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Ray Barrell, Dilruba Karim, Alexia Ventouri, Ray Barrell, Dilruba Karim, Alexia Ventouri. "Interest Rate Liberalization and Capital Adequacy in Models of Financial Crises Interest Rate Liberalization and Capital Adequacy in Models of Financial Crises." (2015)