Abstract
Bank crises in emerging economies have been a feature of the recent global crisis, and their incidence has increased in the post-Bretton Woods era. This paper investigates the impact of financial globalization on the incidence of systemic bank crises in 20 emerging markets over the years 1976–2002 using measures of de facto and de jure financial openness. An increase in foreign debt liabilities contributes to an increase in the incidence of crises, but foreign direct investment and portfolio equity liabilities have the opposite effect. A more liberal de jure capital regime lowers the incidence of banking crises, while a regime of fixed exchange rates increases their frequency. The results of the econometric analysis is consistent with the experience of East European and central Asian emerging markets, which attracted a relatively large proportion of capital flows in the form of debt in recent years and have been particularly hard hit by the global financial crisis.
Similar content being viewed by others
Notes
Angkinand et al. (2008)) and Shehzad and De Haan (2009) investigate the impact of financial liberalization on banking crises using updated versions of the financial liberalization index presented by Abiad and Mody (2005). Both papers present the results of estimations of the disaggregated index, including the impact of capital account liberalization, and both report no evidence of a significant impact of capital deregulation.
Husain et al. (2005) present evidence that emerging markets experience more banking and twin crises than do upper-income or developing economies.
Prasad et al. (2003) provide an overview of the potential benefits of financial globalization.
Since we estimated models with fixed effects, we excluded countries such as Pakistan and South Africa that did not experience banking crises.
Reinhart and Rogoff (2009: 10) refer to the Caprio and Klongbiel data as “authoritative, especially in terms of classifying banking crises into systemic versus more benign categories.”
We did not include the real interest rate as these data are often not reported in emerging markets. There were no interest data available for over 40% of our observations.
Among other researchers who used lagged values are Domaç and Martinez Peria (2003), Eichengreen and Arteta (2002) and von Hagen and Ho (2007). It is possible that the lagged values reflect expectations of future bank crises. But given the rapidity of financial events, it is unlikely that a bank crisis would not occur until the year following the change in expectations.
See Quinn et al. (2010)) for a comparison of the properties of the different types of capital openness measurements.
This definition corresponds to categories 1 through 8 in the Reinhart and Rogoff (2004) classification system.
The estimated coefficients in a logistic regression measure the impact of a change in the independent variable on the odds ratio, i.e., the ratio of the probability of the occurrence of an event relative to the probability of its non-occurrence.
The areas are defined in the Data Appendix.
We omitted data for the Middle East and North African countries as many of these are oil exporters, and the Sub-Saharan African nations as most of these are developing economies.
“Greece and European Banks,” Financial Times, May 3, 2010.
References
Abiad AG, Mody A (2005) Financial Reform: What Shakes It? What Shapes It? Am Econ Rev 95(1):66–88
Aizenman J, Pinto B, Radziwill A (2007) Sources for Financing Domestic Capital—Is Foreign Saving a Viable Option for Developing Countries? J Int Money Financ 26(5):682–702
Angkinand A, Sawangnoenyuang W, Wihlborg C (2008) Financial Liberalization and Banking Crises: A Cross-Country Analysis. Available at www.ssrn.com
Bonfiglioli A (2008) Financial Integration, Productivity and Capital Accumulation. J Int Econ 76(2):337–355
Bordo M, Eichengreen B, Klingebiel D, Martinez-Peria MS (2001) Is the Crisis Problem Growing More Severe? Econ Policy 16(32):53–82
Calvo GA, Reinhart CM (2000) When Capital Inflows Suddenly Stop: Consequences and Policy Options. In: Kenen PB, Swoboda AK (eds) Reforming the International Monetary and Financial System, Washington, DC, pp 175–201
Caprio G, Klingebiel D (1996) Bank Insolvencies, Cross-Country Experience. Policy research working paper No. 1620. World Bank, Washington
Caprio G, Klingebiel D, Laeven L, Noguera G (2005) Banking Crisis Database. In: Honohan P, Laeven L (eds) Systemic Financial Crises: Containment and Resolution. Cambridge University Press, Cambridge, pp 307–340
Caramazza F, Ricci L, Salgado R (2004) International Financial Contagion in Currency Crises. J Int Money Financ 23(1):51–70
Chamberlain G (1980) Analysis of Covariance with Qualitative Data. Rev Econ Stud 47(1):225–238
Chang R, Velasco A (2000) Liquidity Crises in Emerging Markets: Theory and Policy. In: Bernanke BS, Rotemberg JJ (eds) NBER Macroeconomics Annual 1999. MIT, Cambridge, pp 11–58
Chang R, Velasco A (2001) A Model of Financial Crises in Emerging Markets. Q J Econ 116(2):489–517
Chinn M, Ito H (2008a) A New Measure of Financial Openness. J Comp Policy Anal 10(3):307–320
Chinn M, Ito H (2008b) Notes on the Chinn-Ito Financial Openness Index. http://web.pdx.edu/~ito/
Claessens S, Forbes KJ (2001) International Financial Contagion. Kluwer Academic, Dordrecht
Claessens S, Demirgüç-Kunt A, Huizinga H (2001) How Does Foreign Entry Affect Domestic Banking Markets? J Bank Finance 25(5):891–911
Demirgüç-Kunt A, Detragiache E (1998) The Determinants of Banking Crises in Developing and Developed Countries. IMF Staff Pap 45(1):81–109
Demirgüç-Kunt A, Detragiache E (2001) Financial Liberalization and Financial Liability. In: Caprio G, Honohan P, Stiglitz JE (eds) Financial Liberalization: How Far, How Fast? Cambridge University Press, Cambridge, pp 96–122
Demirgüç-Kunt A, Detragiache E (2005) Cross Country Empirical Studies of Systemic Bank Distress: A Survey. Natl Inst Econ Rev 192:68–83
Di Giovanni J, Shambaugh JC (2008) The Impact of Foreign Interest Rates on the Economy: The Role of the Exchange Rate Regime. J Int Econ 74(2):341–361
Domaç I, Martinez Peria MS (2003) Banking Crises and Exchange Rate Regimes: Is There a Link? J Int Econ 61(1):41–72
Edwards S (2007) Capital Controls, Sudden Stops and Current Account Reversals. In: Edwards S (ed) Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences. University of Chicago Press, Chicago, pp 73–113
Eichengreen B, Arteta C (2002) Banking Crises in Emerging Markets: Presumptions and Evidence. In: Blejer MI, Škreb M (eds) Financial Policies in Emerging Markets. MIT, Cambridge, pp 47–94
Eichengreen B, Rose AK (2001) Staying Afloat When the Wind Shifts: External Factors and Emerging-Market Banking Crises. In: Calvo GA, Dornbusch R, Obstfeld M (eds) Money, Capital Mobility and Trade: Essays in Honor of Robert A. Mundell. MIT Press, Cambridge, pp 171–205
Felices G, Hogarth G, Madouros V (2008) Capital Inflows into EMEs since the Millennium: Risks and the Potential Impact of a Reversal. Bank Engl Q Bull 48(1):26–36
Fischer S (2001) Exchange Rate Regimes: Is the Bipolar View Correct? J Econ Perspect 15(2):3–24
Frankel JA, Schmukler SL, Servén L (2004) Global Transmission of Interest Rates: Monetary Independence and Currency Regime. J Int Money Financ 23(5):701–733
Glick R, Hutchison MM (2001) Banking and Currency Crises: How Common Are Twins? In: Glick R, Moreno R, Spiegel MM (eds) Financial Crises in Emerging Markets. Cambridge University Press, Cambridge, pp 35–69
Glick R, Hutchison MM (2005) Capital Controls and Exchange Rate Instability in Developing Economies. J Int Money Financ 24(3):387–412
Glick R, Guo X, Hutchison MM (2006) Currency Crises, Capital-Account Liberalization, and Selection Bias. Rev Econ Stat 88(4):698–714
Gourinchas P-O, Valdés R, Landerretche O (2001) Lending Booms: Latin America and the World. Economía 1(2):47–89
Henry PB (2007) Capital Account Liberalization: Theory, Evidence and Speculation. J Econ Lit 45(4):887–935
Honig A (2006) Is There a Link Between Dollarization and Banking Crises? J Int Dev 18(8):1123–1135
Husain AM, Mody A, Rogoff KS (2005) Exchange Rate Regime Durability and Performance in Developing versus Advanced Economies. J Monet Econ 52(1):35–64
International Monetary Fund (2009) World Economic Outlook. IMF, Washington
Ishii S, Habermeier K (2002) Capital Account Liberalization and Financial Sector Stability. IMF Occasional Paper no. 211. IMF, Washington
Joyce JP, Nabar M (2009) Sudden Stops, Banking Crises and Investment Expenditures in Emerging Markets. J Dev Econ 90(2):314–322
Kaminsky GL, Reinhart CM (1999) The Twin Crises: The Causes of Banking and Balance-of-Payments Problems. Am Econ Rev 89(3):473–500
Kaminsky GL, Reinhart CM (2000) On Crises, Contagion, and Confusion. J Int Econ 51(1):145–168
Klein MW, Shambaugh JC (2008) The Dynamics of Exchange Rate Regimes: Fixes, Floats and Flips. J Int Econ 75(1):70–92
Kose MA, Prasad ES, Terrones ME (2009) Does Openness to International Financial Flows Raise Productivity Growth? J Int Money Financ 28(4):554–580
Laeven L, Valencia F (2008) Systemic Banking Crises: a New Database. Working Paper No. 08/224. IMF, Washington
Lane PR, Milesi-Ferretti GM (2007) The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970–2004. J Int Econ 73(2):223–250
McKinnon RI, Pill H (1996) Credible Liberalizations and International Capital Flows: The “Overborrowing” Syndrome. In: Ito T, Krueger AO (eds) Financial Deregulation and Integration in East Asia. University of Chicago Press, Chicago, pp 7–43
Mendoza EG, Terrones ME (2008) An Anatomy of Credit Booms: Evidence from Macro Aggregates and Micro Data. Working Paper No. 08/226. IMF, Washington
Mishkin FS (2006) The Next Great Globalization: How Disadvantaged Nations Can Harness Their Financial Systems to Get Rich. Princeton University Press, Princeton
Noy I (2004) Financial Liberalization, Prudential Supervision, and the Onset of Banking Crises. Emerg Mark Rev 5(3):341–359
Prasad ES, Rajan R (2008) A Pragmatic Approach to Capital Account Liberalization. NBER Working Paper No. 14051
Prasad ES, Rogoff KS, Wei S-J, Kose MA (2003) Effects of Financial Globalization on Developing Countries: Some Empirical Evidence. Occasional Paper No. 220. IMF, Washington
Quinn DP, Schindler M, Toyoda AM (2010) Measuring Capital and Financial Current Account Openness, working paper
Reinhart C, Rogoff KS (2004) The Modern History of Exchange Rate Arrangements: A Reinterpretation. Q J Econ 119(1):1–48
Reinhart C, Rogoff KS (2009) This Time is Different: Eight Centuries of Financial Folly. Princeton University Press, Princeton
Rossi M (1999) Financial Fragility and Economic Performance in Developing Economies: Do Capital Controls, Prudential Regulation and Supervision Matter? Working Paper No. 99/66. IMF, Washington
Shehzad CT, De Haan J (2009) Financial Liberalization and Banking Crises. Available at www.ssrn.com
Sula O (2009) Surges and Sudden Stops of Capital Flows to Emerging Markets. Open Econ Rev, forthcoming
Von Hagen J, Ho T-K (2007) Money Market Pressure and the Determinants of Banking Crises. J Money, Credit Bank 39(5):1037–1066
Author information
Authors and Affiliations
Corresponding author
Additional information
This paper has benefitted from the research assistance of Virginia Ritter and Leslie Shen, and the comments of two referees of this journal and George Tavlas, Malhar Nabar, Ellis Tallman, and participants at presentations at the Money, Macro and Finance Research Group meeting, the Annual Workshop in Macroeconomic Research at Liberal Arts Colleges, and the Federal Reserve Bank of New York.
Appendix
Appendix
Rights and permissions
About this article
Cite this article
Joyce, J.P. Financial Globalization and Banking Crises in Emerging Markets. Open Econ Rev 22, 875–895 (2011). https://doi.org/10.1007/s11079-010-9179-8
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11079-010-9179-8