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Banking Crisis vs. Credit Crunch? A Cross-Country Comparison of Policy Responses to Dilemmas in Banking Regulation

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Author Info

  • Bernauer Thomas

    (Swiss Federal Institute of Technology)

  • Koubi Vally

    (ETHZ and University of Bern, Switzerland)

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    Abstract

    Restrictive policies aimed at reducing the likelihood of bank failure during recessions tend to increase the probability of a credit crunch. In this paper we infer governments' policy responses to this dilemma by studying the cyclical behavior of bank capital in 1369 banks from 28 OECD countries during the period 1992-98. We find significant differences across countries. In the US and Japan, bank capital is counter-cyclical, that is, the typical bank strengthens its capital base during periods of weak economic activity. In the other countries, there is no relationship between the level of macroeconomic activity and bank capital. From these findings we infer that severe banking crises in the US and Japan may have made policymakers there more vigilant towards “unhealthy” banks, even when this implies an increase in the risk of a credit crunch. In countries without such crisis experience, policymakers seem to be less concerned about future banking crises. Our results suggest that the strong push by the US for the 1988 Basle Accord may have been a reflection of this increased sensitivity. They also suggest that, to the extent business cycles do not develop in synchronicity across countries and policymakers respond differently to the banking crisis-credit crunch dilemma, current reforms of the Basle Accord, which are designed to tighten regulatory requirements, may encounter difficulties.

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    Bibliographic Info

    Article provided by De Gruyter in its journal Business and Politics.

    Volume (Year): 6 (2004)
    Issue (Month): 2 (August)
    Pages: 1-24

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    Handle: RePEc:bpj:buspol:v:6:y:2004:i:2:n:2

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    Web page: http://www.degruyter.com

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    Web: http://www.degruyter.com/view/j/bap

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    Cited by:
    1. Srdjan Marinkovic & Marko Malovic, 2012. "Serbian Credit Market After the Turmoil," Book Chapters, Institute of Economic Sciences.
    2. Giandomenico Piluso & Roberto Ricciuti, 2008. "Fiscal Policy and the Banking System in Italy. Have Taxes, Public Spending and Banks been Procyclical in the Long-Run?," CESifo Working Paper Series 2442, CESifo Group Munich.

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