The Cleansing Effect of Banking Crises

Abstract

We assess the cleansing effects of the 2008-2009 financial crisis. U.S. regions with higher levels of supervisory forbearance on distressed banks see less restructuring in the real sector: fewer establishments, firms, and jobs are lost when more distressed banks remain in business. In these regions, the banking sector has been less healthy for several years after the crisis. Regions with less forbearance experience higher productivity growth after the crisis with more firm entries, job creation, and employment, wages, patents, and output growth. Forbearance is greater for state-chartered banks and in regions with weaker banking competition and more independent banks.

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

JEL Classification: G01, G21, G28, O43