Do financial crises discipline future credit growth?

Abstract

Purpose

The purpose of this paper is to test whether financial crises themselves provide some degree of ex post discipline. In other words, is there learning from the mistakes associated with crises? The authors test this hypothesis on credit growth, a frequent contributor to banking crises.

Design/methodology/approach

The study uses statistical tests (comparison of means) on a sample of 72 banking crises, the onset of which occurred between 1980 and 2008. Tests for significance of the difference are conducted using Kolmogorov–Smirnov equality in distribution tests.

Findings

The results show that real credit growth fell substantially (relative to average) by about 8 per cent points from pre- to post-crisis periods, and that average banking regulation and supervision strengthens after a crisis.

Originality/value

This paper provides empirical support for the proposition that while financial markets may fail to give sufficient warning signals before a financial crisis, they may discipline governments to undertake reforms in the aftermath of a crisis.

Citation

Amri, P., Chiu, E.M.P., Richey, G. and Willett, T.D. (2017), "Do financial crises discipline future credit growth?", Journal of Financial Economic Policy, Vol. 9 No. 3, pp. 284-301. https://doi.org/10.1108/JFEP-03-2017-0020