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Financial Liberalization and Banking Crises: A Cross-Country Analysis-super-

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  • APANARD P. ANGKINAND
  • WANVIMOL SAWANGNGOENYUANG
  • CLAS WIHLBORG

Abstract

Several studies indicate that financial liberalization contributes to the likelihood of a financial crisis. We focus on banking crises and argue that they are most likely to occur after an intermediate degree of liberalization. Using a recently updated dataset for financial reforms in 48 countries between 1973 and 2005, we find an inverted U-shaped relationship between liberalization and the likelihood of crisis. We ask whether the relationship remains when institutional characteristics of countries and dynamic effects of liberalization are considered. The empirical results indicate that the relationship between liberalization and banking crises depends strongly on the strength of capital regulation and supervision. With very weak regulation and supervision, the probability of banking crises is increasing with liberalization but this relationship is reversed as regulation and supervision become stricter. The most important type of liberalization in relation to banking crises seems to be behavioral (a relaxation of interest and credit controls). A policy implication is that positive growth effects of liberalization can be achieved without increasing the risk of a banking crisis if appropriate institutions are developed. Copyright (c) 2010 The Authors. Journal compilation (c) International Review of Finance Ltd. 2010.

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Bibliographic Info

Article provided by International Review of Finance Ltd. in its journal International Review of Finance.

Volume (Year): 10 (2010)
Issue (Month): Financial Crises and Global Market Integration: Part II ()
Pages: 263-292

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Handle: RePEc:bla:irvfin:v:10:y:2010:i:s1:p:263-292

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Cited by:
  1. Christian E. Weller & Ghazal Zulfiqar, 2013. "Financial Market Diversity and Macroeconomic Stability," Working Papers wp332, Political Economy Research Institute, University of Massachusetts at Amherst.
  2. Julian Caballero, 2012. "Do Surges in International Capital Inflows Influence the Likelihood of Banking Crises? Cross-Country Evidence on Bonanzas in Capital Inflows and Bonanza-Boom- Bust Cycles," Research Department Publications 4775, Inter-American Development Bank, Research Department.
  3. Puspa Amri & Apanard P. Angkinand & Clas Wihlborg, 2011. "International comparisons of bank regulation, liberalization, and banking crises," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 3(4), pages 322-339, November.
  4. Davide Furceri & St├ęphanie Guichard & Elena Rusticelli, 2011. "Episodes of Large Capital Inflows and the Likelihood of Banking and Currency Crises and Sudden Stops," OECD Economics Department Working Papers 865, OECD Publishing.
  5. Stolbov, Mikhail, 2013. "Anatomy of international banking crises at the onset of the Great Recession," MPRA Paper 51236, University Library of Munich, Germany.
  6. Hagen, Tobias, 2013. "Impact of national financial regulation on macroeconomic and fiscal performance after the 2007 financial stock: Econometric analyses based on cross-country data," Working Paper Series: Business and Law 02, Frankfurt University of Applied Sciences, Faculty of Business and Law.
  7. Hagen, Tobias, 2013. "Impact of national financial regulation on macroeconomic and fiscal performance after the 2007 financial shock: Econometric analyses based on cross-country data," Economics Discussion Papers 2013-26, Kiel Institute for the World Economy.

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