The global financial crisis and banking sector resilience

What explains variation in banking sector resilience to the 2007–2008 global financial crisis? One possible explanation is that strong regulation prevented countries from undertaking the kind of risky activities that contributed to the crisis. Another possibility is that undeveloped banking systems (or shallow banking) helped shield countries from crisis contagion as companies rely less extensively on external finance. This article examines these explanations alone and in combination through a large-n analysis of bank resilience across 129 developed and developing countries. In creating original empirical measures of banking sector development, regulation and resilience, the analysis suggests that regulation alone cannot explain bank resilience to the shocks of the 2007–2008 financial crisis. The findings that strong regulation had a negative impact in countries with poorly developed banking sectors and that shallow banking is positively related to consistency of bank credit provision to non-financial entities through and beyond the crisis period suggests that one-size-fits-all approach to ‘good’ regulation is not viable.