Working Paper: CEPR ID: DP5088
Authors: Giovanni Dell'Ariccia; Enrica Detragiache; Raghuram G. Rajan
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 were more severe.
Keywords: Bank Lending Channel; Banking Crises
JEL Codes: E44; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| banking crises (G01) | decline in growth in sectors dependent on external finance (O16) |
| banking crises (G01) | decline in real economic activity (F44) |
| sectors dependent on external finance (O16) | decline in growth during banking crises (F65) |
| smaller firm sizes (L25) | suffer more during banking crises (F65) |
| banking crises (G01) | differential effects in developing countries (F63) |
| banking crises (G01) | effects on access to foreign finance (F65) |