Bank Equity and Banking Crises

89 Pages Posted: 14 Feb 2018 Last revised: 9 Nov 2018

See all articles by Matthew Baron

Matthew Baron

Cornell University - Samuel Curtis Johnson Graduate School of Management

Emil Verner

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Wei Xiong

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: November 2, 2018

Abstract

We construct a new historical dataset on bank equity returns for 46 countries over the period 1870-2016 to develop an informative and objective measure of the occurrence and severity of banking crises. We find that large bank equity declines predict persistent credit contractions and output gaps, after controlling for non-financial equities, even outside of banking crises defined by narrative approaches. In particular, severe bank distress without panics are associated with adverse future outcomes. Large bank equity declines tend to precede other crisis indicators, suggesting that substantial bank losses are already present at the early stages of the crisis. Finally, large bank equity declines allow us to refine existing narrative chronologies of banking crises, in which we uncover a number of forgotten banking crises and remove spurious crises.

Keywords: banking crises, financial crises, bank equity

JEL Classification: G01, G15, G21, N20

Suggested Citation

Baron, Matthew and Verner, Emil and Xiong, Wei, Bank Equity and Banking Crises (November 2, 2018). Available at SSRN: https://ssrn.com/abstract=3116148 or http://dx.doi.org/10.2139/ssrn.3116148

Matthew Baron (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

Emil Verner

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Wei Xiong

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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