Working Paper: NBER ID: w26908
Authors: Matthew Baron; Emil Verner; Wei Xiong
Abstract: We examine historical banking crises through the lens of bank equity declines, which cover a broad sample of episodes of banking distress both with and without banking panics. To do this, we construct a new dataset on bank equity returns and narrative information on banking panics for 46 countries over the period 1870-2016. We find that even in the absence of panics, large bank equity declines are associated with substantial credit contractions and output gaps. While panics can be an important amplification mechanism, our results indicate that panics are not necessary for banking crises to have severe economic consequences. Furthermore, panics tend to be preceded by large bank equity declines, suggesting that panics are the result, rather than the cause, of earlier bank losses. We also use bank equity returns to uncover a number of forgotten historical banking crises and to create a banking crisis chronology that distinguishes between bank equity losses and panics.
Keywords: banking crises; equity declines; credit contractions; economic consequences
JEL Codes: G01; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Panics (G01) | Amplified effects of bank equity declines (F65) |
| Large bank equity declines (G21) | Substantial credit contractions (E51) |
| Large bank equity declines (G21) | Reduced economic performance (F69) |
| Large bank equity declines (G21) | Panics (G01) |