Banking fragility and financial crisis prevention in Peru: 1997–1999

This article examines banking fragility in Peru during the 1997–1999 period, with the aim of identifying indicators for the prevention of financial crises and constructing an index to measure the vulnerability of the banking system. The study is set against a backdrop of financial liberalization and external shocks—such as the Asian crisis and the Russian crisis—that affected Latin America. The methodology combines a signaling approach to select risk indicators with a panel logit model to estimate the probability of a crisis at individual banks, using monthly data from 22 banks. The results show that factors such as asset quality, bank management, and macroeconomic conditions significantly influence fragility, revealing that insufficient liquidity and high levels of uncertainty increase vulnerability. The fragility index constructed indicates that the Peruvian banking system faced a moderate crisis following the Russian crisis, underscoring the importance of strict supervisory policies and preventive measures to mitigate future crisis episodes. (Abstract and audio: Department of Economic Publications)