Search

Financial fragility and instability of banking sectors has received increased academic attention due to recent financial crises around the world. The objective of the article is to extend and adapt a previously created financial fragility model of the Czech financial sector in order to reflect its specific conditions. It introduces the concept of minimum required reserves and uses consistent sources of data collected from annual reports of Czech banks in 2013. Besides the prediction of default of households, the model also allows a prediction of key macroeconomic variables such as the inflation and unemployment rates. However, some of the issues of this class of models - in particular, the impossibility to measure some of its exogenous parameters - remain unresolved and present a challenge for the future development of the model. [ABSTRACT FROM AUTHOR]

The purpose of this paper is to create a financial fragility model for the Czech financial sector. We adapt the Goodhart-Tsomocos model which is based on general equilibrium with incomplete markets, money and default. The calibration of the model is based on publicly available data from the period 2003-2011. Finally, we perform comparative statics to show how the key variables of the model respond to possible events. The model can be used by government institutions to stress-test the banking sector, as well as by banking and other financial institutions to estimate the development of, inter alia, the default rates of their clients. The model also incorporates default of households and may be used, after further extension, in predicting households' default rates with respect to the behaviour of banks in consequence of changes in macroeconomic parameters of the environment. [ABSTRACT FROM AUTHOR]