Costs of Banking System Instability: Some Empirical Evidence

34 Pages Posted: 11 Jul 2001  

Glenn Hoggarth

Bank of England

Ricardo Reis

London School of Economics & Political Science (LSE); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Victoria Saporta

Bank of England

Date Written: November 2001

Abstract

This paper assesses the cross-country 'stylised facts' on empirical measures of the losses incurred during periods of banking crises. Firstly, the direct resolution costs to the government are considered, and then the broader costs to the welfare of the economy (proxied by losses in GDP). The cumulative output losses incurred during crisis periods are found to be large, roughly 15%-20% of annual GDP, on average. In contrast to previous research, it is also found that output losses incurred during crises in developed countries are as high, or higher, on average, than those in emerging market economies. Moreover, output losses during crisis periods in developed countries also appear to be significantly larger - 10%-15% - than in neighbouring countries that did not at the time experience severe banking problems. In emerging market economies, by contrast, banking crises appear to be costly only when accompanied by a currency crisis. These results seem robust to allowing for macroeconomic conditions at the outset of crisis - in particular low and declining output growth - that have also contributed to future output losses during episodes.

Suggested Citation

Hoggarth, Glenn and Reis, Ricardo and Saporta, Victoria, Costs of Banking System Instability: Some Empirical Evidence (November 2001). EFA 2001 Barcelona Meetings, Bank of England Working Paper No. 144. Available at SSRN: https://ssrn.com/abstract=276182 or http://dx.doi.org/10.2139/ssrn.276182

Glenn Hoggarth

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Ricardo A.M.R. Reis (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Victoria Saporta

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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