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Inside the crisis : an empirical analysis of banking systems in distress

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  • Demirguc-Kunt, Asli
  • Detragiache, Enrica
  • Gupta, Poonam

Abstract

Much of the substantial literature on banking crises, focuses on early warning indicators. The authors look at what happens to the economy, and the banking sector after a banking crisis breaks out. Much of the theory of banking crises assigns a central role to depositor runs, with vulnerability to runs viewed as a basic characteristic of banks as financial intermediaries. But banking systems can be financially distressed, even when depositors do not withdraw their deposits, if other bank creditors rush for the exit, or if banks become insolvent. Are contemporary banking crises characterized by large declines in deposits? The authors find that contemporary banking crises are not accompanied by declines in aggregate bank deposits, and credit does not fall relative to output, but the growth of both deposits, and credit does slow down substantially. Output recovery begins the second year after the crisis, and is not led by a resumption of credit growth. Instead, banks (including the stronger banks) reallocate their asset portfolio away from loans. This suggests that protecting deposits during a banking crisis, may not be enough to protect bank credit, as lack of usable collateral, and poor borrower creditworthiness, discourage banks from lending. However, protecting bank credit may not be a priority right after a crisis, as the real economy can rebound without it, at least while there is substantial under-used capacity.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2431.

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Date of creation: 31 Aug 2000
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Handle: RePEc:wbk:wbrwps:2431

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Keywords: Financial Intermediation; Banks&Banking Reform; Financial Crisis Management&Restructuring; Payment Systems&Infrastructure; Economic Theory&Research; Banks&Banking Reform; Financial Intermediation; Financial Crisis Management&Restructuring; Economic Theory&Research; Insurance&Risk Mitigation;

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  1. Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
  2. Flannery, Mark J, 1994. "Debt Maturity and the Deadweight Cost of Leverage: Optimally Financing Banking Firms," American Economic Review, American Economic Association, vol. 84(1), pages 320-31, March.
  3. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
  4. Roberto Chang & Andres Velasco, 1998. "Financial Fragility and the Exchange Rate Regime," NBER Working Papers 6469, National Bureau of Economic Research, Inc.
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  8. Ghosh, Swati R. & Ghosh, Atish R., 2000. "East Asia in the aftermath: Was there a crunch?," Research Notes 00-5, Deutsche Bank Research.
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  10. Frederic S. Mishkin, 1996. "Understanding Financial Crises: A Developing Country Perspective," NBER Working Papers 5600, National Bureau of Economic Research, Inc.
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  12. Demirguc-Kunt, Asl1 & Huizinga, Harry, 1999. "Market discipline and financial safety net design," Policy Research Working Paper Series 2183, The World Bank.
  13. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 1999. "Prospective deficits and the asian currency crisis," Policy Research Working Paper Series 2174, The World Bank.
  14. Demirguc-Kunt, Asli & Detragiache, Enrica, 2002. "Does deposit insurance increase banking system stability? An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1373-1406, October.
  15. Ben S. Bernanke, 1983. "Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression," NBER Working Papers 1054, National Bureau of Economic Research, Inc.
  16. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
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  20. Leslie Teo & Charles Enoch & Carl-Johan Lindgren & Tomás J. T. Baliño & Anne Marie Gulde & Marc Quintyn, 2000. "Financial Sector Crisis and Restructuring," IMF Occasional Papers 188, International Monetary Fund.
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  22. Wei Ding & Domac, Ilker & Ferri, Giovanni, 1998. "Is there a credit crunch in East Asia?," Policy Research Working Paper Series 1959, The World Bank.
  23. Asli Demirgüç-Kunt & Enrica Detragiache, 2000. "Does Deposit Insurance Increase Banking System Stability?," IMF Working Papers 00/3, International Monetary Fund.
  24. Asli Demirgüç-Kunt & Enrica Detragiache, 1998. "The Determinants of Banking Crises in Developing and Developed Countries," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 81-109, March.
  25. repec:ucp:bknber:9780226454627 is not listed on IDEAS
  26. Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June.
  27. Demirguc, Asli & Detragiache, Enrica, 2000. "Monitoring Banking Sector Fragility: A Multivariate Logit Approach," World Bank Economic Review, World Bank Group, vol. 14(2), pages 287-307, May.
  28. Atish R. Ghosh & Swart R. Ghosh, 1999. "East Asia in the Aftermath," IMF Working Papers 99/38, International Monetary Fund.
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