Ebook Financial Globalization and Banking Crises In Emerging Markets
Bank crises have become a more frequent occurrence in the post-Bretton Woods era, particularly in emerging markets. Bordo et al. (2001) report that the incidence of bank crises and “twin crises,” i.e., combined banking and currency crises, was higher in the 1973-1997 period than in the previous era or during the Gold Standard. They also find that such crises have been primarily an emerging market phenomenon. Similarly, Husain, Mody and Rogoff (2005) present evidence which demonstrates that emerging markets experience more banking and twin crises than do upper-income or developing economies. They point out that such economies are more exposed to capital flows than developing economies, but have more fragile financial sectors than the advanced economies.
Moreover, these events are costly. Honohan and Laeven (2005) place the fiscal cost of banking crises in developing countries over the last 25 years at over $1 trillion. Dobson and Hufbauer (2001) estimate an average output loss of 2 percent of GDP during each year of these crises. This cost extends over time as investment declines during a banking crisis, which reduces long-term growth.
One area of the research devoted to improving our understanding of banking crises has sought to identify their determinants. Demirgüç-Kunt and Detragiache (1998), for example, found that macroeconomic factors, such as low GDP growth and high inflation rates, increased the probability of a crisis taking place. They also found that financial variables, such as the growth of credit to the private sector, were significant in the determination of banking crises. Other relevant studies include those of Demirgüç-Kunt and Detragiache (2001), Domaç and Martinez Peria (2003), Eichengreen and Rose (2001), Glick and Hutchison (2001), Honig (2006), Mendis (2002), Noy (2004), Rossi (1999) and von Hagen and Ho (2007).
In addition to domestic variables, the external sector, and in particular international financial flows, may also play a role in the occurrence of banking crises. However, empirical analyses which have examined the effect of capital controls on banking crises generally find no evidence of any linkage. Bordo et al. (2001), for example, reported a negative correlation between capital controls and bank crises for 21 countries during the period of 1880-1997; however, when the empirical analysis was done for the post-1973 period alone, the coefficient on the capital controls variable was not statistically significant. Eichengreen and Arteta (2002) found that a dummy variable for capital account liberalization had no influence in their study of banking crises in 75 developing countries over the period of 1975-1997. Similarly, Edwards (2007) concluded in a study of 163 countries during the years 1970-2000 that banking crises occurred irrespective of the degree of capital mobility.
This paper extends the previous work in several directions. First, we concentrate on the experience of emerging markets, since they have been most vulnerable to banking crises. We also expand the sample period to 2002 to include the record of the post-1997 crises. Second, we examine the impact of both de facto and de jure financial globalization. Third, we also investigate the impact of financial openness on the duration of these crises and their output losses.
The next section of the paper discusses how financial globalization could contribute to banking crises in emerging markets. Section 3 describes the data utilized in the empirical analysis. The fourth section reports the results for the panel analysis of the determinants of bank crises. Section 5 investigates the duration of these crises, and the following section examines their output losses. The final section summarizes the results and derives some policy implications.
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