Foreign Booms, Domestic Busts: The Global Dimension of Banking Crises

49 Pages Posted: 6 Feb 2017

See all articles by Ambrogio Cesa-Bianchi

Ambrogio Cesa-Bianchi

Bank of England

Fernando Eguren Martin

Bank of England

Gregory Thwaites

Bank of England - Monetary Analysis

Date Written: February 3, 2017

Abstract

This paper provides novel empirical evidence showing that foreign financial developments are a powerful predictor of domestic banking crises. Using a new data set for 38 advanced and emerging economies over 1970–2011, we show that credit growth in the rest of the world has a large positive effect on the probability of banking crises taking place at home, even when controlling for domestic credit growth. Our results suggest that this effect is larger for financially open economies, and is consistent with transmission via cross-border capital flows and market sentiment. Direct contagion from foreign crises plays an important role, but does not account for the whole effect.

Keywords: Financial crises, global credit cycle, banking, financial stability, sentiment

JEL Classification: E32, E44, E52, G01

Suggested Citation

Cesa-Bianchi, Ambrogio and Eguren Martin, Fernando and Thwaites, Gregory, Foreign Booms, Domestic Busts: The Global Dimension of Banking Crises (February 3, 2017). Bank of England Working Paper No. 644. Available at SSRN: https://ssrn.com/abstract=2912259 or http://dx.doi.org/10.2139/ssrn.2912259

Ambrogio Cesa-Bianchi (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

HOME PAGE: http://https://sites.google.com/site/ambropo/

Fernando Eguren Martin

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Gregory Thwaites

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

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