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Inside the crisis : an empirical analysis of banking systems in distress, Volume 1
 
Author:Demirguc-Kunt, Asli; Detragiache, Enrica; Gupta, Poonam; Collection Title:Policy, Research working paper ; no. WPS 2431
Date Stored:2003/07/30Document Date:2000/08/31
Document Type:Policy Research Working PaperSubTopics:Financial Crisis Management & Restructuring; Payment Systems & Infrastructure; Economic Theory & Research; Banks & Banking Reform; Insurance & Risk Mitigation; Financial Intermediation
Language:EnglishMajor Sector:Finance
Report Number:WPS2431Sub Sectors:(Historic)Other finance
Volume No:1  

Summary: Much of the substantial literature on banking crises, focuses on early warning indicators. The authors look at what happens to the economy, and the banking sector after a banking crisis breaks out. Much of the theory of banking crises assigns a central role to depositor runs, with vulnerability to runs viewed as a basic characteristic of banks as financial intermediaries. But banking systems can be financially distressed, even when depositors do not withdraw their deposits, if other bank creditors rush for the exit, or if banks become insolvent. Are contemporary banking crises characterized by large declines in deposits? The authors find that contemporary banking crises are not accompanied by declines in aggregate bank deposits, and credit does not fall relative to output, but the growth of both deposits, and credit does slow down substantially. Output recovery begins the second year after the crisis, and is not led by a resumption of credit growth. Instead, banks (including the stronger banks) reallocate their asset portfolio away from loans. This suggests that protecting deposits during a banking crisis, may not be enough to protect bank credit, as lack of usable collateral, and poor borrower creditworthiness, discourage banks from lending. However, protecting bank credit may not be a priority right after a crisis, as the real economy can rebound without it, at least while there is substantial under-used capacity.

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