Honesty best for preventing bank crises, report says

Ethics are far more important than economics in preventing bank crises, according to a report published today by Berlin-based corruption watchdog Transparency International.

The study, Transparency and its Impact on Financial Fragility, used data from bank crises around the world over the past 30 years and correlated the probability of a crisis with 10 variables. The five economic variables - inflation, credit ratio, real interest rate, credit growth rate and GDP growth rate - were found to have little effect on the likelihood of a crisis: an extra point of GDP growth reduced the chance of a crisis by between 12% and 26%, but none of the others made a difference of more than 11% per point of increase.

By contrast, the five ethical variables - corruption, favouritism, judicial independence, prevalence of insider trading and effective regulation - all had dramatic effects. Transparency International measures ethical qualities on a seven-point scale, and a single point of increase on any of the five dramatically reduces the chance of a bank crisis - up to 89%, in the case of judicial independence.

The study's author, Saadia Zahidi, a researcher at the Institute of International Studies in Geneva, said: "While crises may erupt in a relatively short period of time, they are usually the result of long-term fundamental problems in a country’s financial institutions."

She added that the results would boost calls for global financial standards, such as those produced by the Bank for International Settlements, and better transparency on a national level.