Abstract:
This research investigates what would be the significant economic and financial
indicators that leads to a Banking Crisis and build a platform to take prudential
economics actions in order to prevent Banking Crisis. Prior to economy leads to a
Bank Crisis, Pattern of indicators can be identified. By using those significant
indicators, a warning system will be made at the end of this research as the final result
for the financial system of a country. Throughout this warning system, it will be
assistance to predict the future scenarios in relation to the financial system. The
development of aggregate baking stability index for 10 years shows that the level of
financial stability has deteriorated during the global financial tsunami in 2008 and
European debt crisis in 2010 in Sri Lanka. Internal incidents very much affect the
banking sector of Sri Lanka. At the end of this research I check whether what are the
variables had been more sensitized during above mentioned crisis. Base on those
results, it can be checked that whether the economy leads to a banking crisis or not
according to the selected variables.
