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Larger crises cost more: impact of banking sector instability on output growth

Author

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  • Dobromil Serwa

    (Warsaw School of Economics, National Bank of Poland)

Abstract

We propose a method for calculating the macroeconomic costs of banking crises that controls for the downward impact of recessions on banking activity. In contrast to earlier research, we estimate the cost of crises based on the size of banking crises. The extent of a crisis is measured using banking sector aggregates. The results, based on our method and data from over 100 banking crises, suggest that the size of a crisis matters for economic growth. Lower credit, deposit and money growth during crises cause GDP growth to decline.

Suggested Citation

  • Dobromil Serwa, 2008. "Larger crises cost more: impact of banking sector instability on output growth," Working Papers 25, Department of Applied Econometrics, Warsaw School of Economics.
    • Handle: RePEc:wse:wpaper:25
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    2. Kashif Abbass & Abdul Aziz Khan Niazi & Abdul Basit & Tehmina Fiaz Qazi & Huaming Song & Halima Begum, 2021. "Uncovering Effects of Hot Potatoes in Banking System: Arresting Die-Hard Issues," SAGE Open, , vol. 11(4), pages 21582440211, December.
    3. Qiongbing Wu & Rebel A. Cole, 2024. "Macroeconomic conditions and bank failure," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 43(5), pages 1212-1234, August.
    4. Puspa Amri & Apanard P. Angkinand & Clas Wihlborg, 2011. "International comparisons of bank regulation, liberalization, and banking crises," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 3(4), pages 322-339, November.
    5. GHITA-MITRESCU Silvia & DUHNEA Cristina, 2015. "An Overview On The Romanian Banking System Stability," Revista Economica, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 67(1), pages 55-67, February.
    6. Mirzaei, Ali & Grosse, Robert, 2019. "The interaction of quantity and quality of finance: Did it make industries more resilient to the recent global financial crisis?," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 493-512.
    7. Wilms, Philip & Swank, Job & de Haan, Jakob, 2018. "Determinants of the real impact of banking crises: A review and new evidence," The North American Journal of Economics and Finance, Elsevier, vol. 43(C), pages 54-70.
    8. Ambrosius, Christian, 2017. "What explains the speed of recovery from banking crises?," Journal of International Money and Finance, Elsevier, vol. 70(C), pages 257-287.
    9. Aizenman, Joshua & Noy, Ilan, 2013. "Macroeconomic adjustment and the history of crises in open economies," Journal of International Money and Finance, Elsevier, vol. 38(C), pages 41-58.
    10. Stefan Eichler, 2017. "How Do Political Factors Shape the Bank Risk–Sovereign Risk Nexus in Emerging Markets?," Review of Development Economics, Wiley Blackwell, vol. 21(3), pages 451-474, August.
    11. Vithessonthi, Chaiporn, 2014. "Financial markets development and bank risk: Experience from Thailand during 1990–2012," Journal of Multinational Financial Management, Elsevier, vol. 27(C), pages 67-88.
    12. Jokipii, Terhi & Monnin, Pierre, 2013. "The impact of banking sector stability on the real economy," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 1-16.
    13. José María Díez-Esteban & Jorge Bento Farinha & Conrado Diego García-Gómez & Cesario Mateus, 2022. "Does board composition and ownership structure affect banks’ systemic risk? European evidence," Journal of Banking Regulation, Palgrave Macmillan, vol. 23(2), pages 155-172, June.
    14. Lagoarde-Segot, Thomas & Leoni, Patrick L., 2013. "Pandemics of the poor and banking stability," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4574-4583.
    15. Fernández, Ana I. & González, Francisco & Suárez, Nuria, 2013. "How do bank competition, regulation, and institutions shape the real effect of banking crises? International evidence," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 19-40.
    16. Ambrosius, Christian, 2016. "What Explains the Speed of Recovery from Banking Crises?," VfS Annual Conference 2016 (Augsburg): Demographic Change 145606, Verein für Socialpolitik / German Economic Association.
    17. Aizenman, Joshua & Noy, Ilan, 2013. "Macroeconomic adjustment and the history of crises in open economies," Journal of International Money and Finance, Elsevier, vol. 38(C), pages 41-58.
    18. Sun, Junjie & Wu, Deming & Zhao, Xinlei, 2018. "Systematic risk factors and bank failures," Journal of Economics and Business, Elsevier, vol. 98(C), pages 1-18.
    19. Wilms, Philip & Swank, Job & de Haan, Jakob, 2018. "Determinants of the real impact of banking crises: A review and new evidence," The North American Journal of Economics and Finance, Elsevier, vol. 43(C), pages 54-70.
    20. Goossens, Roman & Mori, Rogério & Teles, Vladimir Kuhl, 2014. "Do capital controls boost EME´s resilience to financial crises?," Textos para discussão 370, FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil).
    21. Dobromił Serwa, 2012. "Banking crises and nonlinear linkages between credit and output," Applied Economics, Taylor & Francis Journals, vol. 44(8), pages 1025-1040, March.
    22. Dumitriu, Ramona & Stefanescu, Răzvan, 2013. "Decizii strategice ale politicii monetare [Strategic decisions of the Monetary Policy]," MPRA Paper 51242, University Library of Munich, Germany, revised 05 Nov 2013.
    23. Eichler, Stefan, 2015. "How Do Political Factors Shape the Bank Risk-Sovereign Risk Nexus in Emerging Markets?," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112877, Verein für Socialpolitik / German Economic Association.

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    Keywords

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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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