The main determinants of banking crises in OECD countries

Abstract

Banks’ stability can be affected by economic fluctuations, banks’ risk-taking behavior, connections among banks and countries’ financial system structure. At the same time, banking regulation and supervision were designed to protect banks from failure, but a large number of banking crises were not prevented recently. Using binary response models for panel data and focusing on OECD countries, this paper studies the main determinants of banking crises over a period of 21 years. Results suggest a bank’s high debt and a country’s low GDP growth rate as the major determinants of banking crises. There is also evidence of contagion across countries from the same geographical region and from G7 to other countries, and that bank-based financial systems are less prone to borderline banking crises. Regulatory and supervision practices are found not to have been relevant in bankruptcy prevention.

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Notes

  1. 1.

    All OECD countries except New Zealand.

  2. 2.

    A banking crisis episode occurs when a country experiences a banking crisis in a given year. Therefore, if in the same year two countries experience a banking crisis, two episodes are considered; if the banking crisis in a given country spans over 2 years, two episodes are also considered.

  3. 3.

    Country dummies were only included for countries with recorded banking crises.

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Acknowledgements

The authors thank the Editor and the referees for their valuable suggestions and remarks. Cristina Pereira Pedro (post-doctoral fellowship SFRH/BPD/108826/2015), Joaquim J. S. Ramalho (Grant UID/GES/00315/2013) and Jacinto Vidigal da Silva (Grants UID/ECO/04007/2013 and POCI-01-0145-FEDER-007659) are pleased to acknowledge financial support from Fundação para a Ciência e a Tecnologia.

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Correspondence to Cristina Pereira Pedro.

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Pereira Pedro, C., Ramalho, J.J.S. & da Silva, J.V. The main determinants of banking crises in OECD countries. Rev World Econ 154, 203–227 (2018). https://doi.org/10.1007/s10290-017-0294-0

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Keywords

  • Banking crises
  • Regulation
  • Supervision
  • OECD countries
  • Contagion effect

JEL Classification

  • G01
  • G21
  • G28