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Article
Publication date: 1 April 2014

Felix Rioja, Fernando Rios-Avila and Neven Valev

While the literature studying the effect of banking crises on real output growth rates has found short-lived effects, recent work has focused on the level effects showing…

Abstract

Purpose

While the literature studying the effect of banking crises on real output growth rates has found short-lived effects, recent work has focused on the level effects showing that banking crises can reduce output below its trend for several years. This paper aims to investigate the effect of banking crises on investment finding a prolonged negative effect.

Design/methodology/approach

The authors test to see whether investment declines after a banking crisis and, if it does, for how long and by how much. The paper uses data for 148 countries from 1963 to 2007. Econometrically, the authors test how banking crises episodes affect investment in future years after controlling for other potential determinants.

Findings

The authors find that the investment to GDP ratio is on average about 1.7 percent lower for about eight years following a banking crisis. These results are robust after controlling for credit availability, institutional characteristics, and a host of other factors. Furthermore, the authors find that the size and duration of this adverse effect on investment varies according to the level of financial development of a country. The largest and longer-lasting decrease in investment is found in countries in a middle region of financial development, where finance plays its most important role according to theory.

Originality/value

The authors contribute by finding that banking crisis can have long-term effects on investment of up to nine years. Further, the authors contribute by finding that the level of development of the country's financial markets affects the duration of this decrease in investment.

Details

Journal of Financial Economic Policy, vol. 6 no. 1
Type: Research Article
ISSN: 1757-6385

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Book part
Publication date: 11 December 2006

O. Emre Ergungor and James B. Thomson

Systemic banking crises can have devastating effects on the economies of developing or industrialized countries. This paper reviews the factors that weaken banking systems…

Abstract

Systemic banking crises can have devastating effects on the economies of developing or industrialized countries. This paper reviews the factors that weaken banking systems and make them more susceptible to crises. It is the first of two papers examining root causes of banking crises and time-consistent policies for resolving them.

Details

Research in Finance
Type: Book
ISBN: 978-1-84950-441-6

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Book part
Publication date: 4 October 2018

Soumya Bhadury and Bhanu Pratap

In the economic literature, a crisis has been thematically defined around bank runs, failure of large financial corporations, and financial distress. Section 1 summarizes…

Abstract

In the economic literature, a crisis has been thematically defined around bank runs, failure of large financial corporations, and financial distress. Section 1 summarizes our learnings about international banking crisis, in terms of the origin and impact of such crises. This provides us an international benchmark before we delve deeper into India's banking distress, its size and trends. Section 2 focuses on the twin-balance-sheet crisis in India. On one side, corporate firms recklessly overleveraged, resulting in excess capacities and business diversification. On the other side, banks, both private and public, fell prey to excessive and procyclical credit lending and improper monitoring. Overall, too many projects were left too weakly monitored. Separately, we have focused on two subsections, first, how the financial institutions in India have overstretched their credit-disposal limit during market upturns. Second, we found absence of any theoretically grounded approaches to determine the capital-adequacy ratios (CARs) for the banks. In Section 3, we have identified the steps taken so far by the Banking regulator and the Government to resolve the crisis. Further, we critically examine the role of Korea Asset Management Corporation (KAMCO) towards a successful non-performing assets (NPAs) resolution in South Korea. Few key takeaways include, (1) establishing a public asset-management company (AMC) focused on maximization of recoveries and resolution of stressed assets, (2) well-defined governance structure for the AMC ensuring it works on market principles, shielded from political interferences, and (3) realistic asset valuation and transfer price that ensures limited downside risks for the public AMC.

Details

Banking and Finance Issues in Emerging Markets
Type: Book
ISBN: 978-1-78756-453-4

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Article
Publication date: 8 November 2011

Puspa Amri, Apanard P. Angkinand and Clas Wihlborg

The recurrence of banking crises throughout the 1980s and 1990s, and in the more recent 2008‐09 global financial crisis, has led to an expanding empirical literature on…

Abstract

Purpose

The recurrence of banking crises throughout the 1980s and 1990s, and in the more recent 2008‐09 global financial crisis, has led to an expanding empirical literature on crisis explanation and prediction. The purpose of this paper is to provide an analytical review of proxies for and important determinants of banking crises‐credit growth, financial liberalization, bank regulation and supervision.

Design/methodology/approach

The study surveys the banking crisis literature by comparing proxies for and measures of banking crises and policy‐related variables in the literature. Advantages and disadvantages of different proxies are discussed.

Findings

Disagreements about determinants of banking crises are in part explained by the difference in the chosen proxies used in empirical models. The usefulness of different proxies depends partly on constraints in terms of time and country coverage but also on what particular policy question is asked.

Originality/value

The study offers a comprehensive analysis of measurements of banking crises, credit growth, financial liberalization and banking regulations and concludes with an assessment of existing proxies and databases. Since, the review points to the choice of proxies that best fit specific research objectives, it should serve as a reference point for empirical researchers in the banking crisis area.

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Article
Publication date: 26 October 2018

Silvana Bartoletto, Bruno Chiarini, Elisabetta Marzano and Paolo Piselli

This paper aims to focus on the banking crises recorded in Italy in the period 1861-2016 and to propose a novel classification based upon the timing of the crisis with…

Abstract

Purpose

This paper aims to focus on the banking crises recorded in Italy in the period 1861-2016 and to propose a novel classification based upon the timing of the crisis with respect to the business cycle.

Design/methodology/approach

A simple and objective rule to distinguish between slowdown and inner-banking crises is introduced. The real impact of banking crises is evaluated by integrating the narrative approach with an empirical vector autoregression analysis.

Findings

First, banking crises are not always associated to economic downturns. Especially in Italy, (but this analysis can be easily extended to other countries), they have often limited their negative effects within the financial system (“inner” crises). Second, the simultaneity of macroeconomic effects (credit contraction and GDP recession) leave the causal link undetermined. Third, the empirical and narrative analyses performed testify that boom–bust mechanisms are an exception in the panorama of (Italian) banking crises; although when the economy experiences such episodes, the economic and social consequences are not only severe but also enduring.

Research limitations/implications

To classify historically recognized banking crisis episodes, the authors look at credit and GDP dynamics (and their ratio) around crisis years. Relying on a single definition of crisis is avoided. The classification provides an empirical rule to determine in what way banking crises differ. The classification is mostly based on the synchronization with the business cycle and, using the documented evolution of macroeconomic aggregates, it permits to highlight the fact that a variety of interactions occur between financial and real aggregates during and around banking crises.

Originality/value

As to the concept of systemic banking crisis, a qualitative judgment is often adopted to select relevant episodes, thus confirming the absence of a quantitative rule in classification criteria (Chaudron and de Haan, 2014). This paper proposes a simple and objective rule to distinguish between slowdown and inner-banking crises; the former occur close to a GDP contraction, whereas the latter appear to spread their effects with no substantial evidence of output loss.

Details

Journal of Financial Economic Policy, vol. 11 no. 1
Type: Research Article
ISSN: 1757-6385

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Article
Publication date: 23 November 2010

M. Sükrü Erdem

The 2008‐2009 crisis had no significant impact on the Turkish banking system (TBS), with the TBS achieving a record level of profitability in 2009. The strong position of…

Abstract

Purpose

The 2008‐2009 crisis had no significant impact on the Turkish banking system (TBS), with the TBS achieving a record level of profitability in 2009. The strong position of Turkish banks against the global crisis is attributed generally to the good regulation and risk management in the TBS. The measures implemented by The Turkish Central Bank, and The Banking Regulation and Supervision Agency, e.g. high capital adequacy ratio, played a significant role. But, this judgment does not take into consideration the high profitability and some inefficiency of TBS in his role of financial intermediation. The purpose of this paper is to analyze the TBS's performance in the face of the global crisis.

Design/methodology/approach

The paper compare the measures against the global crisis and the performances of banking systems by public supports to financial sector, measures taken vis‐à‐vis the crisis, ratios as deposits/loans, loans to non‐financial sector and return to assets.

Findings

The paper explains that the performance of TBS against the crisis is, to some extent, due to the high profitability and low efficiency in financial intermediation.

Practical implications

Financial regulation and policy particularly in emerging or underdeveloped economies should find equilibrium between the soundness and efficiency of banking system.

Originality/value

In full financial crisis the majority of scientific work focuses on the prudential regulation of the banking system and the problem of moral hazard. In fact, countries such as Turkey are still far from having the same problems and concerns. The paper shows that in spite of the global crisis, the TBS continued to obtain very raised profits: it can be said that the banking system soundness improved with the detriment the non‐financial sector.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 3 no. 4
Type: Research Article
ISSN: 1753-8394

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Article
Publication date: 4 October 2011

Lukasz Prorokowski

Previous academic literature indicates that the case of the banking crises recovery, in view of implemented regulations and policies, differs across times and countries…

Abstract

Purpose

Previous academic literature indicates that the case of the banking crises recovery, in view of implemented regulations and policies, differs across times and countries. This is explained by varied institutional environments in which banking sectors operate, and in which financial crises persist. Therefore, the aim of this study is to prioritize investigation of the regulatory framework in the crisis‐response policies across European countries affected by the current financial turmoil. In order to elicit most accurate results and fill in the gap in existing literature on banking crises, the paper aims to focus on both qualitative and quantitative methodological frameworks in order to ensure that the concerns raised by practitioners are addressed and implications for the regulatory processes instrumented.

Design/methodology/approach

The emphasis of the current study has been laid to flag the region‐ and country‐specific vulnerabilities in regulatory framework employed for banking crisis recovery. Additional focus has been put on groups of systemic risk which evolved from the current financial crisis and ways these risks can be ameliorated. Furthermore, the current paper strives to explore the ideas of ways to ameliorate negative outcomes of the global crisis and mitigate common risks with reference to the flawed regulations. Especially, important issues have been raised by the interviewed experts who put forward their opinions on the ways of lifting the regulatory shortcomings and costs of remedies identified in the study and who provided solutions to ensuring the financial stability of European capital markets.

Findings

The study highlighted areas of regulations that require immediate attention and which failed to prevent financial markets from the current banking crisis. These findings are then summarized with constructive proposals on how to amend banking sector and financial regulations. The study also provides a cross‐European comparison of the financial crisis‐recovery policies, evaluating solutions adopted in various selected European countries. Henceforth, the empirical model tested the possibility of a tradeoff existing between remedies which involve substantial public funds and exert burden on both fiscal balances and taxpayers, and the speed and effectiveness of the recovery processes. To this point, no tradeoff has been found. Moreover, contrasting the current banking crisis to the past financial market disturbances, highlighted the magnitude of the nascent economic downturn prevailing in Europe.

Originality/value

Since the existing body of literature abounds in studies devoted to investigations of the causes for the current banking crisis, the research focus of this paper has been shifted away from the factors and flawed regulations that trigger banking crises. To this point, the paper has traits of pioneering work.

Details

Qualitative Research in Financial Markets, vol. 3 no. 3
Type: Research Article
ISSN: 1755-4179

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Article
Publication date: 28 September 2012

Lukasz Skowron and Kai Kristensen

The purpose of this paper is to ask two questions. How does the customer's loyalty in the banking sector change (at both the structural and quantitative level) in the…

Abstract

Purpose

The purpose of this paper is to ask two questions. How does the customer's loyalty in the banking sector change (at both the structural and quantitative level) in the light of the financial and banking crises? Are any differences observed in those changes between developing and developed countries?

Design/methodology/approach

The paper consists of two parts: theoretical and empirical. In the theoretical part the authors discuss the nature of the banking and financial crises, the historical perspective of banking crises occurrence and main causes and consequences of those crises. The second part of the paper demonstrates statistical analysis of the obtained data from the Polish and European banking sector. The authors also present socio‐demographic characteristic of the research samples and the character of the bank‐client relations, comparative analysis of customer satisfaction index changes in the European banking sector and structural equation modes for the Polish banking sector for the years 2007‐2009.

Findings

The analyses allowed the authors to confirm the main research hypotheses: first, clients of developing European countries demonstrate generally lower satisfaction and loyalty levels than clients of banks in Western Europe. Second, the recent banking crisis has affected the level of customer satisfaction much more strongly in developing European countries than in developed ones. Third, the recent banking crisis has changed the character of the process of building customer satisfaction and loyalty in Poland by strengthening the influence of the image area.

Originality/value

Hardly anyone has tried to measure the influence of the banking crises at the level of customers’ satisfaction and the structure of the process of building long‐term relations between banks and their clients before.

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Book part
Publication date: 23 October 2017

Tiago Cardao-Pito

In the euro’s initial years, Greece, Ireland, Italy, Portugal and Spain observed capital flow bonanzas and credit-booms, two cycles known to precede banking crises

Abstract

In the euro’s initial years, Greece, Ireland, Italy, Portugal and Spain observed capital flow bonanzas and credit-booms, two cycles known to precede banking crises. Domestic banks fuelled those cycles via funding obtained from foreign financial institutions. Yet, these countries’ banking and financial crises have unfolded in different modes. In Ireland and Spain, credit-booms propelled real-estate bubbles, which dragged banks into crises, with governments’ accounts later being affected when rescuing banks (Spanish regional banks, and all Irish major banks). In Greece and Italy, extra monetary means perpetuated government imbalances (e.g. debt levels above 100% of GDP, large yearly deficits). More severely in Greece, banks were brought into crises by sovereign crises. In Portugal, a mixture of private and public sector–led crises have occurred. Our comparative study finds that these crises: (1) are connected to shocks and imbalances caused by dangerous banking sector cycles during the monetary integration process; (2) were not mere expansions of the US subprime crisis; (3) were not only caused by country-specific features and institutions; and (4) followed distinct paths, therefore, a uniform model encompassing all post-euro crises cannot exist.

Details

Economic Imbalances and Institutional Changes to the Euro and the European Union
Type: Book
ISBN: 978-1-78714-510-8

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Book part
Publication date: 24 October 2013

Franklin Allen, Xian Gu and Oskar Kowalewski

In this chapter we study the intra-group transactions between the parent bank and its foreign subsidiaries in European Union (EU) countries during the crisis. We use…

Abstract

In this chapter we study the intra-group transactions between the parent bank and its foreign subsidiaries in European Union (EU) countries during the crisis. We use hand-collected data from annual statements on related party transaction and find that they may create a serious problem for the stability of the foreign banks’ subsidiaries. Moreover, as some of those subsidiary banks were large by assets in some of the member states the related party transactions with the parent bank created a serious threat to the host countries’ financial system stability. We attribute this transaction to the weak governance in foreign subsidiaries. We suggest improvements in governance as well as greater disclosure of related party transactions in bank holding companies in Europe.

Details

Global Banking, Financial Markets and Crises
Type: Book
ISBN: 978-1-78350-170-0

Keywords

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