The Cleansing Effect of Banking Crises

60 Pages Posted: 28 Jul 2020 Last revised: 16 Aug 2020

See all articles by Reint Gropp

Reint Gropp

Halle Institute for Economic Research

Steven Ongena

University of Zurich - Department of Banking and Finance; NTNU Business School; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)

Jörg Rocholl

ESMT European School of Management and Technology; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Vahid Saadi

IE Business School, IE University

Date Written: July 2020

Abstract

We assess the cleansing effects of the recent banking crisis. In U.S. regions with higher levels of supervisory forbearance on distressed banks during the crisis, there is less restructuring in the real sector and the banking sector remains less healthy for several years after the crisis. Regions with less supervisory forbearance experience higher productivity growth after the crisis with more firm entries, job creation, and employment, wages, patents, and output growth. Supervisory forbearance is greater for state-chartered banks and in regions with weaker banking competition and more independent banks, while recapitalization of distressed banks through TARP does not facilitate cleansing.

Keywords: banking crises, cleansing effect, Productivity Growth, supervisory forbearance

JEL Classification: G01, G21, G28, O43

Suggested Citation

Gropp, Reint and Ongena, Steven R. G. and Ongena, Steven R. G. and Rocholl, Joerg and Saadi, Vahid, The Cleansing Effect of Banking Crises (July 2020). CEPR Discussion Paper No. DP15025, Available at SSRN: https://ssrn.com/abstract=3650140

Reint Gropp (Contact Author)

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Steven R. G. Ongena

NTNU Business School ( email )

Norway

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Joerg Rocholl

ESMT European School of Management and Technology ( email )

Schlossplatz 1
Berlin
Germany

HOME PAGE: http://www.esmt.org/en/159244

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Vahid Saadi

IE Business School, IE University

Calle Maria de Molina 12
Madrid, Madrid 28006
Spain

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