The impact of conflict and political instability on banking crises in developing countries

While there is an extensive literature examining the economic impact of conflict and political instability, surprisingly, there have been few studies on their impact on the probability of banking crises. This paper therefore investigates whether rising conflict and political instability globally over the past several decades led to increased occurrence of banking crises in developing countries. The paper provides strong evidence that conflicts and political instability are indeed associated with higher probability of systemic banking crises. Interestingly, the paper also finds that conflicts and political instability in one country can have negative spillover effects on neighbouring countries’ banking systems. The paper provides evidence that the primary channel of transmission is likely to be the occurrence of fiscal crises following a conflict or political instability.