The Real Effect of Banking Crises

By Giovanni Dell'Ariccia, Raghuram Rajan, Enrica Detragiache

March 1, 2005

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Giovanni Dell'Ariccia, Raghuram Rajan, and Enrica Detragiache. The Real Effect of Banking Crises, (USA: International Monetary Fund, 2005) accessed December 3, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Banking crises are usually followed by a decline in credit and growth. Is this because crises tend to take place during economic downturns, or do banking sector problems have independent negative effects on the economy? To answer this question we examine industrial sectors with differing needs for financing. If banking crises have an exogenous detrimental effect on real activity, then sectors more dependent on external finance should perform relatively worse during banking crises. The evidence in this paper supports this view. Additional support comes from the fact that sectors that predominantly have small firms, and thus are typically bank-dependent, also perform relatively worse during banking crises. The differential effects across sectors are stronger in developing countries, in countries with less access to foreign finance, and where banking crises have been more severe.

Subject: Bank credit, Banking, Banking crises, Currency crises, Financial crises

Keywords: Bank distress, Crisis inception, Growth differential, Interaction term, Lending channel, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2005/063
Stock No:

WPIEA2005063
ISBN:

9781451860825
ISSN:

1018-5941

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