The Spatial Probit Model – An Application to the Study of Banking Crises at the End of the 90’s

We use a spatial Probit model to study the effect of contagion between banking systems of different countries. Applied to the late 90’s banking crisis in Asia we show that the phenomena of contagion is better seized using a spatial than a traditional Probit model. Unlike the latter, the spatial Probit model allows one to consider the cascade of cross and feedback effects of contagion that result from the outbreak of one initial crisis in one country or system. These contagion effects may result either from business connections between institutions of different countries or from institutional similarities between banking systems.