The banking exposure to international lending: Regional differences or common fundamentals?

Abstract

The present study unveils the importance of regional characteristics of sovereign debt crises in Latin America and South East Asia. It proposes and empirically corroborates a refinement of the logit approach, for assessing sovereign risk, which draws upon a region-specific parameterization - composite estimator. The analysis identifies some common features of debt crises that largely reflect domestic solvency, liquidity factors and, to a lesser extent, trade-balance variables and external shocks. Nonetheless, heterogeneity effects and regional signals point towards the use of region-specific models. Such approach depicts specific risk factors such as openness and debt burden for Latin America and reserves, output and government expenditure for Asia, thereby suggesting distinctive aspects to debt crises. Out-of-sample forecast comparisons further support the use of the composite estimator. The latter outperforms the simple pooled and random effects approach on the basis of various criteria, albeit slightly biased towards false non-crises predictions. © 2005 New York University Salomon Center.