The Real Effect of Banking Crises

Posted: 6 May 2005  

Raghuram G. Rajan

University of Chicago - Booth School of Business; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)

Enrica Detragiache

International Monetary Fund (IMF) - European Department

Giovanni Dell'Ariccia

International Monetary Fund (IMF) - Research Department; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2005

Abstract

Banking crises are usually followed by a decline in credit and growth. Is this because crises tend to take place during economic downturns, or do banking sector problems have independent negative effects on the economy? To answer this question we examine industrial sectors with differing needs for financing. If banking crises have an exogenous detrimental effect on real activity, then sectors more dependent on external finance should perform relatively worse during banking crises. The evidence in this paper supports this view. Additional support comes from the fact that sectors that predominantly have small firms, and thus are typically bank-dependent, also perform relatively worse during banking crises. The differential effects across sectors are stronger in developing countries, in countries with less access to foreign finance, and where banking crises have been more severe.

JEL Classification: E44, G21

Suggested Citation

Rajan, Raghuram G. and Detragiache, Enrica and Dell'Ariccia, Giovanni, The Real Effect of Banking Crises (March 1, 2005). IMF Working Paper No. 05/63. Available at SSRN: https://ssrn.com/abstract=716061

Raghuram G. Rajan (Contact Author)

University of Chicago - Booth School of Business ( email )

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Chicago, IL 60637
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International Monetary Fund (IMF) ( email )

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National Bureau of Economic Research (NBER)

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773-702-9299 (Phone)
773-702-0458 (Fax)

Enrica Detragiache

International Monetary Fund (IMF) - European Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Giovanni Dell'Ariccia

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-8135 (Phone)
202-623-4352 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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