, Volume 22, Issue 5, pp 875-895

Financial Globalization and Banking Crises in Emerging Markets

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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.

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.