Banking sector distress and economic growth resilience: Asymmetric effects

Over the last decade, banking sector stability has received much attention as Basel III implementations take shape in response to the Global Financial Crisis of 2008. Since said crisis, regulators have increased banking sector regulation and supervision in an effort to increase banking sector resilience and avert potential future crises. Notwithstanding the importance of these regulatory and supervisory enhancements, we consider the potential threat of a banking crisis and investigate the ability of important banking stability parameters to provide economic growth resilience. We perform a Generalized Method of Moments (GMM) estimation methodology on a global panel dataset of 140 countries, across the period 1995–2017, to determine the effect of banking sector stability, banking sector regulatory capital, and banking sector liquidity, on the relationship between banking crises and GDP growth. Our results indicate that a more stable banking sector reduces the negative effect of a banking crisis on GDP growth, hence providing economic resilience during said crisis periods. This effect is experienced by developed and developing economies. However, asymmetries are observed for banking sector liquidity and banking sector regulatory capital across high-income and middle-income economies. Liquidity provides resilience for economic growth, but the effect is only apparent for high-income countries. Regulatory capital provides growth resilience, but this effect is not apparent for high-income economies. We argue that while overall banking stability is critical, regulators and other policymakers must account for the differences in the relevant characteristics of their market structures when designing effective strategies in order to maximize the effectiveness of said policies.