Bubble detection on real estate exposure of ASEAN banks as an early warning indicator of financial crisis

• Main Authors: Bigay, Francis Carmi B., Tiu, Tomas S.
• Format: text
• Published: Animo Repository 2019
• Subjects: Financial crises; Banks and banking—Real estate business—Southeast Asia; Finance and Financial Management
• Online Access: https://animorepository.dlsu.edu.ph/faculty_research/11257
• Institution: De La Salle University

This study is about the development of an early warning indicator for real estate bubble from the top ASEAN-5 banks before another financial crisis will happen. The study’s objective is to identify the presence of a bubble in the real estate sector in the ASEAN region and to mitigate it by preparing the banks with an early warning system. The study used panel data regression to determine the warning threshold the vector error correction model (VECM) for bubble detection, and logistic regression in developing the early warning system. The study used leading macroeconomic indicators and banking variables like the banks’ real estate exposures, non-performing loans, deposit growth rate, effective interest rate, stock prices, inflation rate, GDP growth rate and real exchange rate. Results from the Schwartz Information Criterion (SIC) ranged from 3 to 5 showing that the model is likely to be true. Augmented Dicky-Fuller Test showed stationarity. The ASEAN-5 banks have a possibility of cointegrating relationship but the macroeconomic variables were significant. The Philippine banks appeared in the warning zone in the rainfall advisory that there is a possibility of overheating in their real estate exposure. Both Malaysia and Thailand’s banks did not appear to have in the rainfall advisory at all and are overall okay. Vietnam’s banks fell in the overheating zone indicating possibility of loan defaults in their real estate portfolio. Indonesia’s banks appear in the warning zone indicating a possibility of overheating in their real estate exposure. Overall, the results of the real estate exposures of the ASEAN-5 banks showed mixed results in their individual country’s rainfall advisories where the banks’ of 3 countries of the region’s banks showed the possibility of overheating in the real estate exposure s while only 2 countries showed healthy real estate exposures. The model will be a great help to regulators and the banking industry in the ASEAN5 to forewarn them of overheating and bubble detection in their real estate exposures to avoid future financial crisis.