Determinants of banking crises (Fragility) in the Malawian banking sector

Abstract

This paper studies the determinants of banking crises or fragility in Malawi. In this study we modelled banking crisis conditions in a developing country banking sector applying a Logistic Regression model using data for Malawi for the period 1980 to 2022. We embedded banking crisis dummy, bank specific and macroeconomic drivers of crisis in the model. Our study finds that under crisis conditions macroeconomic, monetary and fiscal drivers such as the ratio of external debt stock to gross national income ratio, debt service costs to primary export revenue ratio, broad money to GDP ratio, changes in real interest rates, growth in real GDP, total reserves to GDP ratio has a negative and significant impact on banking crisis and fragility in Malawi. These findings are important for policy makers especially in an environment where fiscal dominance is prevalent and drives a significant build up of domestic debt (treasury assets) on the banks’ balance sheets.