The determinants of banking crises : evidence from developing and developed countries

In the 1980s and early 1990s several countries experienced severe banking crises. This study attempts to identify which features of the economic environment tend to breed banking sector problems by econometrically estimating the probability of a systemic crisis using a multivariate logit model. The data come from a large panel of countries, including both developed and developing economies, and cover the period 1980.94. Countries that never have experienced banking problems are included in the panel and serve as controls. The paper concludes that crises tend to occur in a weak macroeconomic environment characterized by slow GDP growth and high inflation; also, high real interest rates are typically associated with the emergence of banking sector problems. When these effects are controlled, neither the rate of currency depreciation nor the fiscal deficit is significant. The tests also indicate that vulnerability to sudden capital outflows, a high share of credit to the private sector, and high past credit growth may be associated with a higher probability of a crisis. Another factor that leads to increased banking sector vulnerability in the sample is the presence of explicit deposit insurance, suggesting that moral hazard has played a major role. Finally, countries with weak institutions (as measured by a .law and order. index) are more at risk.