Financial crisis and financial policy reform: Crisis origins and policy dimensions

This paper analyzes the role of financial crises in the financial policy reform process, including the liberalization of the financial system and the strengthening of prudential regulation. This study considers five types of financial crises and seven dimensions of financial policy reform to evaluate the comprehensive relationships between financial crises and financial policy reform by assuming a financial crisis as an endogenous variable. Our work confirms the crisis-begets-reform argument in the context of financial liberalization by showing that all types of financial crises promote financial liberalization even when possible endogeneity problems are addressed. However, financial policy reform following financial crises does not generally include the strengthening of prudential regulation. Given the argument that financial liberalization without prudential regulation often causes financial instability or crises, our findings emphasize that policy makers should pay attention not only to financial liberalization but also to prudential regulation. Moreover, the results show that the origin of a financial crisis matters when financial regulators choose the policy dimensions of financial reform.