Do banking crises improve democracy?

  • Beni Kouevi-Gath
  • Pierre-Guillaume MéonEmail author
  • Laurent Weill


We study the relationship between banking crises and the level of democracy. We use an event-study method on a sample of up to 129 countries over the period 1975–2010 featuring 94 systemic banking crises. We find that banking crises are followed by an improvement in democracy and report evidence suggesting that the relation may be causal. The bulk of the improvement takes place between 3 and 10 years after the banking crisis. The impact of a banking crisis is greater in non-democratic countries and when the banking crisis is severe. We explain this finding by the fact that banking crises create windows of opportunity to contest autocratic regimes.


Banking crisis Democracy Regime change Transitions 

JEL Classification

D72 H11 



We thank the editors and two anonymous referees. We are grateful to Peter Bernholz, Christian Bjørnskov, Richard Bluhm, Andrea Cinque, Michael Dorsch, Tommy Krieger, Florian Loipersberger, Felix Noth, and Niklas Protrafke for valuable comments and suggestions. We also express gratitude to participants of the 2019 Silvaplana workshop in political economy, the European Public Choice Society conference in Rome, the Beyond Basic Questions workshop in Gengenbach, and the annual meeting of the Association for Comparative Economic Studies/Allied Social Sciences Association in Atlanta. Nevertheless, we vigorously claim that the responsibility for any remaining error is ours. This research benefited from a Tournesol grant awarded by Wallonie-Bruxelles International, F.R.S-FNRS, FWO, the French Embassy in Brussels, the Ministry of Europe and Foreign Affairs and the Ministry of Higher Education in France.

Supplementary material

11127_2019_730_MOESM1_ESM.docx (188 kb)
Supplementary material 1 (DOCX 187 kb)


  1. Acemoglu, D., Naidu, S., Restrepo, P., & Robinson, J. A. (2019). Democracy does cause growth. Journal of Political Economy, 127(1), 47–100.Google Scholar
  2. Acemoglu, D., & Robinson, J. (2001). A theory of political transitions. American Economic Review, 91(4), 938–963.Google Scholar
  3. Andersson, F. N. (2016). A blessing in disguise? Banking crises and institutional change. World Development, 83, 135–147.Google Scholar
  4. Bernholz, P. (1979). Freedom and constitutional economic order. Journal of Institutional and Theoretical Economics, 135, 510–532.Google Scholar
  5. Bernholz, P. (1991). The constitution of totalitarianism. Journal of Institutional and Theoretical Economics, 147, 425–440.Google Scholar
  6. Bernholz, P. (1995). Causes of changes in political-economic regimes. In L. Gerken (Ed.), Competition among Institutions. London: Palgrave Macmillan.Google Scholar
  7. Bernholz, P. (2000). Democracy and capitalism: Are they compatible in the long-run? Journal of Evolutionary Economics, 10, 3–16.Google Scholar
  8. Bernholz, P. (2010). Politics, financial crisis, central bank constitution and monetary policy (Freiburger Diskussionspapiere zur Ordnungsökonomik, 10/5). Freiburg: Walter Eucken Institut.Google Scholar
  9. Bluhm, R., Crombrugghe, D.D., & Szirmai, A. (2019). Do weak institutions prolong crises? On the identification, characteristics, and duration of declines during economic slumps. World Bank Economic Review (forthcoming).Google Scholar
  10. Brückner, M., & Ciccone, A. (2011). Rain and the democratic window of opportunity. Econometrica, 79(3), 923–947.Google Scholar
  11. Burke, P. J., & Leigh, A. (2010). Do output contractions trigger democratic change? American Economic Journal: Macroeconomics, 2(4), 124–157.Google Scholar
  12. Caballero, J. A. (2014). Do surges in international capital inflows influence the likelihood of banking crises? The Economic Journal, 126(591), 281–316.Google Scholar
  13. Carvalho, D. (2014). The real effects of government-owned banks: Evidence from an emerging market. Journal of Finance, 69(2), 577–609.Google Scholar
  14. Chodorow-Reich, G. (2014). The employment effects of credit market disruptions: Firm-level evidence from the 2008-9 financial crisis. Quarterly Journal of Economics, 129(1), 1659.Google Scholar
  15. Claessens, S., Klingebiel, D., & Laeven, L. (2002). Financial restructuring in banking and corporate sector crises: Which policies to pursue? In D. Klingebiel & L. Laeven (Eds.), Managing the real and fiscal effects of banking crises (Vol. 428, pp. 1–13). Washington, D.C: World Bank.Google Scholar
  16. de Haan, J., & Sturm, J. E. (2017). Finance and income inequality: A review and new evidence. European Journal of Political Economy, 50, 171–195.Google Scholar
  17. Demirgüç-Kunt, A., & Detragiache, E. (1998). The determinants of banking crises in developing and developed countries. IMF Staff Papers, 45(1), 81–109.Google Scholar
  18. Dinc, S. (2005). Politicians and banks: Political influences on government-owned banks in emerging countries. Journal of Financial Economics, 77(2), 453–479.Google Scholar
  19. Englmaier, F., & Stowasser, T. (2017). Electoral cycles in savings bank lending. Journal of the European Economic Association, 15(2), 296–354.Google Scholar
  20. Funke, M., Schularick, M., & Trebesch, C. (2016). Going to extremes: Politics after financial crises. 1870–2014. European Economic Review, 88, 227–260.Google Scholar
  21. Gries, T., & Meierrieks, D. (2013). Do banking crises cause terrorism? Economics Letters, 119(3), 321–324.Google Scholar
  22. Gründler, K., & Krieger, T. (2016). Democracy and growth: Evidence from a machine learning indicator. European Journal of Political Economy, 45, 85–107.Google Scholar
  23. Gutmann, J., Pfaff, K., & Voigt, S. (2017). Banking crises and human rights. Applied Economics Letters, 24(19), 1–4.Google Scholar
  24. Haggard, S., & Webb, S. B. (1993). What do we know about the political economy of economic policy reform? The World Bank Research Observer, 8(2), 143–168.Google Scholar
  25. Hoggarth, G., Reis, R., & Saporta, V. (2002). Costs of banking system instability: Some empirical evidence. Journal of Banking & Finance, 26(5), 825–855.Google Scholar
  26. Ivashina, V., & Scharstein, D. (2010). Bank lending during the financial Crisis of 2008. Journal of Financial Economics, 97(1), 319–338.Google Scholar
  27. Jordà, Ò. (2005). Estimation and inference of impulse responses by local projections. American Economic Review, 95(1), 161–182.Google Scholar
  28. Kuran, T. (1989). Sparks and prairie fires: A theory of unanticipated political revolution. Public Choice, 61(1), 41–74.Google Scholar
  29. Kuran, T. (1991). Now out of never: The element of surprise in the East European revolution of 1989. World Politics, 44(1), 7–48.Google Scholar
  30. Lacroix, J., Méon, P.-G., & Sekkat, K. (2017). Do democratic transitions attract foreign investors and how fast? (No. 17-006). ULB-Universite Libre de Bruxelles.Google Scholar
  31. Laeven, L., & Valencia, F. (2008). Systemic banking crises: A new database, International Monetary Fund, Working Paper No. 08/224.Google Scholar
  32. Laeven, L., & Valencia, F. (2012). Systemic banking crises database: An update, International Monetary Fund, Working Paper No. 12/163.Google Scholar
  33. Lipscy, P. Y. (2018). Democracy and financial crisis. International Organization, 72(4), 937–968.Google Scholar
  34. Marshall, M.G., Gurr, T.R., & Jaggers, K. (2017). Polity IV project: Political regime characteristics and transitions, 1800–2016. Center for Systemic Peace.Google Scholar
  35. Mendoza, E.G., & Terrones, M.E. (2008). An anatomy of credit booms: Evidence from macro aggregates and micro data (No. w14049). National Bureau of Economic Research.Google Scholar
  36. Reinhart, C.M., & Reinhart, V.R. (2008). Capital flow bonanzas: An encompassing view of the past and present (No. w14321). National Bureau of Economic Research.Google Scholar
  37. Reinhart, C. M., & Rogoff, K. S. (2009). This time is different: Eight centuries of financial folly. Princeton: Princeton University Press.Google Scholar
  38. Reinhart, C. M., & Rogoff, K. S. (2013). Banking crises: An equal opportunity menace. Journal of Banking & Finance, 37(11), 4557–4573.Google Scholar
  39. Ricklefs, M. C. (2008). A history of modern Indonesia since c. 2000. Basingtoke: Macmillan.Google Scholar
  40. Roodman, D. (2009). How to do xtabond2: An introduction to difference and system GMM in Stata. Stata Journal, 9(1), 86–136.Google Scholar
  41. Tripp, A. M. (2000). Political reform in Tanzania: The struggle for associational autonomy. Comparative Politics, 32(2), 191–214.Google Scholar
  42. Villalón, L. A., & Idrissa, A. (2005). The tribulations of a successful transition: Institutional dynamics and elite rivalry in Mali. In L. A. Villalón & P. VonDoepp (Eds.), The fate of Africa’s democratic experiments: Elites and institutions (pp. 49–74). Bloomington: Indiana University Press.Google Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  • Beni Kouevi-Gath
    • 1
  • Pierre-Guillaume Méon
    • 2
    Email author
  • Laurent Weill
    • 3
    • 4
  1. 1.Centre Emile Bernheim, ECARES, Solvay Brussels School of Economics and ManagementUniversité libre de Bruxelles (ULB)BrusselsBelgium
  2. 2.Centre Emile Bernheim, Solvay Brussels School of Economics and ManagementUniversité libre de Bruxelles (ULB)BrusselsBelgium
  3. 3.EM Strasbourg Business SchoolUniversity of StrasbourgStrasbourg CedexFrance
  4. 4.Moscow State Institute of International RelationsMGIMO UniversityMoscowRussia

Personalised recommendations