Effect Of Banking Crises Research Articles

The effects of financial crisis on income inequality

SummaryMotivationDo financial crises affect everyone equally? Despite the growing concern about income inequality recently, mixed empirical findings have resulted in a long‐standing debate about the distribution of income in the aftermath of financial crises.PurposeThe study examines how different types of financial crises affect the distribution of income.Methods and approachIn this study we used a two‐step system Generalized method of moments (GMM) model to explore the effects of financial crisis on income inequality.FindingsAny type of financial crisis results in a larger income gap between the rich and the poor. Although little attention has been given to debt and twin and triple crises, they are associated with higher income inequality than banking and currency crises. We also show that the effects of banking crises on income inequality in low‐income, lower‐middle income and upper‐middle income countries (LICs, LMICs and UMICs respectively) are more pronounced than in high‐income countries (HICs).Policy implicationsLong‐ and medium‐term plans for social assistance programmes in LICS, LMICs and UMICs are needed and should be flexible so that social safety nets can be rapidly adjusted to protect vulnerable groups. Maintaining a high level of fiscal balance during tranquil periods is critical to implementing welfare state expansion policies in times of crisis. Top marginal income and estate taxes should be raised to avoid very high concentrations of income in the aftermath of financial crises. The minimum wage should also be raised to protect low‐income workers.

Banking crises and exports: Lessons from the past

This paper analyzes the impact of banking crises on manufacturing exports, exploiting the fact that sectors differ in their needs for external financing. Relying on data from 160 developed and developing countries during 1970–2012, we analyze 147 banking crisis episodes and separate their impact on export growth from the impact of other exogenous shocks (e.g., demand shocks, exchange rate shocks). Our findings show that during a crisis, the exports of sectors more dependent on external finance grow significantly less than other sectors. However, this result holds only for sectors that depend on banking finance as opposed to interfirm finance (i.e., trade finance or trade credit). For sectors that depend heavily on banking finance, the effect of banking crises on exports is robust, additional to external demand shocks, and not driven by exchange rate shocks.

Banking Crises and Market Discipline in Indonesian Banking Industry

This study analyzes the effect of banking crises towards market discipline in Indonesia. This study uses two periods of crisis in Indonesia, which are banking crisis in 1997/1998 and banking crisis in 2008. The dependent variable is market discipline; while bank risks are the independet variables (insolvency, liquidity, and credit risks). The control variables are banking level (the percentage savings of the customer, bank’s size, bank’s overhead costs, and Lerner index); industrial level (banking concentration level, the bank development); and macroeconomic variables (the growth of the real gross domestic product and inflation rate). The variables examined by the Generalized Method of Moments (GMM). This study finds a fact that on average market discipline weakens after Indonesia's banking crisis in 1997/1998. On the contrary, this study found a fact that market discipline strengthens after Indonesia's banking crisis in 2008. Eventually, this study finds a fact that there is no difference in market discipline between the domestic bank and foreign bank after Indonesia's banking crisis in 2008.

Banking crises and human rights

ABSTRACTWe examine the effect of banking crises on a country’s protection of basic human rights. Our results indicate that banking crises have a causal, substantive and robust negative effect on human rights, particularly in nondemocracies. This adds to our understanding of how economic shocks can politically destabilize countries.

What explains the speed of recovery from banking crises?

While a large body of research has explored the causes and effects of banking crises, less is known about what determines recovery from banking crises, despite large variations in post-crisis performances across countries. In order to identify local and global factors that determine the length of recovery (i.e. the time it takes until countries reach their pre-crisis level of per capita GDP), this exploratory paper employs event–history analysis on 138 incidents of banking crises between 1970 and 2012. Regarding domestic factors, the simultaneous occurrence of currency crises, large financial sectors, overvalued currencies and large primary deficits are associated with later recovery, whereas higher debt-to-GDP ratios or inflation levels do not exhibit a negative effect on post-crisis performances. Regarding external factors, a low growth of world trade as well as indicators of uncertainty in financial markets are correlated with later recovery. Global interest rate shocks are particularly harmful for the speed of recovery among middle-income countries with a strong reliance on external capital. The results are similar when using the length of recessions as an alternative indicator of post-crisis performances.

The Effects of Financial Crises on Political Institutions

We examine the effect of banking crises on a country’s protection of basic human rights. Our results indicate that banking crises have a causal, substantive, and robust negative effect on human rights.

Stock markets and the costs of banking crises

Purpose – This paper aims to investigate whether stock markets can reduce the output costs of banking crises. The work is motivated by Alan Greenspan’s claim that capital markets serve as a financial “spare tire” in the event of a banking crisis. Design/methodology/approach – We test the impact of stock market capitalization, liquidity and turnover on the output losses of 76 banking crises in 66 countries over the period of 1975-2008. Findings – Our results indicate that stock markets can mitigate the effect of banking crises on economic activity. There is also some evidence that foreign equity holdings lower output costs. Practical implications – These results suggest that the development of equity markets will contribute to reducing the costs of banking crises. Such development, however, should be accompanied by adequate supervisory and regulatory oversight. Originality/value – Our analysis is the first direct empirical investigation of the impact of stock markets on the output costs of banking crises. This paper demonstrates that equity markets can lessen the severity of such crises.

The persistent effect of banking crises on investment and the role of financial markets

Purpose – While the literature studying the effect of banking crises on real output growth rates has found short-lived effects, recent work has focused on the level effects showing that banking crises can reduce output below its trend for several years. This paper aims to investigate the effect of banking crises on investment finding a prolonged negative effect. Design/methodology/approach – The authors test to see whether investment declines after a banking crisis and, if it does, for how long and by how much. The paper uses data for 148 countries from 1963 to 2007. Econometrically, the authors test how banking crises episodes affect investment in future years after controlling for other potential determinants. Findings – The authors find that the investment to GDP ratio is on average about 1.7 percent lower for about eight years following a banking crisis. These results are robust after controlling for credit availability, institutional characteristics, and a host of other factors. Furthermore, the authors find that the size and duration of this adverse effect on investment varies according to the level of financial development of a country. The largest and longer-lasting decrease in investment is found in countries in a middle region of financial development, where finance plays its most important role according to theory. Originality/value – The authors contribute by finding that banking crisis can have long-term effects on investment of up to nine years. Further, the authors contribute by finding that the level of development of the country's financial markets affects the duration of this decrease in investment.

Do banking crises cause terrorism?

We analyze the effect of banking crises on terrorist activity for 146 countries between 1972 and 2006. We show that banking crises lead to a subsequent increase in terrorism. This effect is only relevant in less developed economies.

Virtuous Financial Crises? Empirical Evidence on the Medium-Term Effects of Banking Crises on Productivity Growth

This paper aims to shed light on the medium term effects of banking crises on productivity growth, bringing the 'creative destruction' hypothesis to the data. The analysis is done at both the macro and micro levels. At the macro level, I study the differences in mean productivity growth before and after a crisis using data on aggregate productivity for a sample of 77 systemic banking crises. I find that during the subsequent seven years after a crisis productivity grows, on average, faster than during the seven years before the crisis. At the micro level, I exploit the differences in external finance dependence across twenty one economic sectors and find that sectors that rely more on external finance exhibit, on average, comparatively faster productivity growth in the seven years following a crisis. Overall, the results indicate medium term faster productivity growth after crises, in line with the creative destruction hypothesis.

Banking crises and the lending channel: Evidence from industrial firms in developing countries

ABSTRACTThis paper analyzes how banking crises affect firms' debt structure (availability and maturity). The results show that banking crises reduce both the availability and the maturity of firms' debt in developing countries. The negative effect of banking crises on firms' debt structure is, moreover, greater in small firms and in firms with less growth opportunities. However, the higher the bank market concentration, the lower the negative effect of banking crises on firms' debt availability and maturity. This finding suggests that during banking crises there are benefits from concentrated banking systems that foster investment in the creation of close lending relationships. The results also show a reduction in the negative impact of banking crises in countries with stricter restrictions on non-traditional banking activities and stronger official supervisory power.

The effect of banking crises on deposit growth: State-level evidence from 1900 to 1930

Using a newly constructed database of bank failures for the period 1900 to 1930, this paper estimates a dynamic regression model to examine the extent to which banking instability at the state level affects the proportion of state deposits relative to national deposits. The main results indicate that banking failures reduce the proportion of state deposits by approximately 0.04% in the short run and by nearly 1% in the long run. In the eight states that adopted deposit insurance systems during the 1910s, however, there is little evidence that banking crises affected deposit growth. In addition, there is no evidence that the banking crisis of the 1980s and 1990s had any significant effect on state deposit growth. These results suggest that deposit insurance may have lessened the effects of banking instability on deposit growth.

Banking crises, regulation, and growth: the case of Russia

Recent empirical analyses of the relationship between financial system development and economic growth find that financial system development causes economic growth, is a good predictor of growth and that its impact is relatively large. Moreover, the empirical literature predicts that the adverse effects of banking crises on economic growth will rise in the absence of an adequate response by the government. Hence, given the Russian government's failure to respond adequately to the 1998 banking crisis, Russia's strong economic growth since the crisis is a puzzle. This study uses simulations to conclude that the growth costs of the 1998 crisis were larger than previously suggested. The adverse effects were compensated by expansionary effects. The findings corroborate the importance of financial development in promoting growth in transition countries.