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Banking Crises and Economic Activity: Observations from Past Crises in Developed Countries

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  • Ellis Connolly

Abstract

This paper examines twelve banking crises that occurred in developed countries between the 1970s and 1990s and highlights the macroeconomic adjustment paths experienced during these episodes. The banking crises were generally preceded by financial deregulation, which sparked rapid real credit growth and asset price inflation. During the booms, the lending standards of banks deteriorated and prudential supervision was inadequate. The most serious crises coincided with deep and prolonged slowdowns in economic activity, starting with falling credit growth and asset prices, followed by a sharp fall in investment and a slowing in consumption, partly offset by a rise in net exports. Governments responded with a range of policies to restore the health of the banking sector, along with monetary and fiscal stimulus. The paper concludes by comparing these past crises with the recent banking crises in the United States and parts of Europe, where the deterioration of lending standards appears to have been an important factor once again.

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  • Ellis Connolly, 2009. "Banking Crises and Economic Activity: Observations from Past Crises in Developed Countries," Economic Papers, The Economic Society of Australia, vol. 28(3), pages 206-216, September.
  • Handle: RePEc:bla:econpa:v:28:y:2009:i:3:p:206-216
    DOI: 10.1111/j.1759-3441.2009.00031.x
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    File URL: https://doi.org/10.1111/j.1759-3441.2009.00031.x
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    1. Besley, Timothy J. & Meads, Neil & Surico, Paolo, 2008. "Household External Finance and Consumption," CEPR Discussion Papers 6934, C.E.P.R. Discussion Papers.
    2. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1996. "The Financial Accelerator and the Flight to Quality," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 1-15, February.
    3. Stijn Claessens & Daniela Klingebiel & Luc Laeven, 2001. "Financial Restructuring in Banking and Corporate Sector Crises: What Policies to Pursue?," NBER Working Papers 8386, National Bureau of Economic Research, Inc.
    4. Davide Furceri & Annabelle Mourougane, 2009. "Financial Crises: Past Lessons and Policy Implications," OECD Economics Department Working Papers 668, OECD Publishing.
    5. David Haugh & Patrice Ollivaud & David Turner, 2009. "The Macroeconomic Consequences of Banking Crises in OECD Countries," OECD Economics Department Working Papers 683, OECD Publishing.
    6. Reinhart, Carmen M. & Rogoff, Kenneth S., 2013. "Banking crises: An equal opportunity menace," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4557-4573.
    7. Caprio, Gerard Jr. & Klingebiel, Daniela, 1996. "Bank insolvencies : cross-country experience," Policy Research Working Paper Series 1620, The World Bank.
    8. Broda, Christian, 2004. "Terms of trade and exchange rate regimes in developing countries," Journal of International Economics, Elsevier, vol. 63(1), pages 31-58, May.
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    Cited by:

    1. Stijn Ferrari & Mara Pirovano, 2016. "Does one size fit all at all times? The role of country specificities and state dependencies in predicting banking crises," Working Paper Research 297, National Bank of Belgium.

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