Do political factors influence banking crisis?

Abstract

This paper investigates the impending political determinants of banking crisis in advanced economies. In particular, we consider the impact of domestic credit growth on the likelihood of banking crisis and analyse possible constraints on the part of the governments in curbing the unsustainable credit growth. The endogeneity corrected results reveal that the household credit growth has greater impact on the likelihood of banking crisis than the enterprise credit growth. The political channel shows that if governments are concerned about domestic approval rates, then there is a higher chance of credit boom, which in turn increases the prospect of banking crisis. Interestingly, the findings reveal that the presence of an independent and well-functioning central bank mitigates the crisis probability and reduces the opportunistic behaviour of governments.