Systemic Banking Crises, Financial Liberalization and Governance
Multinational Finance Journal, Vol.18, 3/4, 2014, pp. 281-336
43 Pages Posted: 10 Dec 2014 Last revised: 18 May 2015
Date Written: August 16, 2014
This paper revisits the relationship between liberalization and systemic banking crisis in light of a more comprehensive measure of financial liberalization and its interaction with various measures of banking governance and institutional quality. We estimate the probability of systemic banking crisis for a sample of 53 countries using multivariate logit models and allowing the determinants of crisis to vary across country groups. The results show that liberalization increases the likelihood of crisis only at early stages of financial reforms and up to certain level, after which, greater liberalization, through more advanced financial reforms, tends to reduce the probability of systemic banking crisis. We also find that stricter banking regulation and supervision, better law and order, government stability, lack of corruption and bureaucratic efficiency generally lead to reduced probability of crisis. However, the magnitude and significance of the beneficial effects of governance largely depend on the degree of liberalization and vary across countries depending on their levels of income and development.
Keywords: Systemic Banking Crises; Early Warning Systems; Multivariate Logistic Regressions; Financial Liberalization; Institutional Quality and Banking Governance
JEL Classification: E44, F36, G15, G18, G21, G28
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