eThesis - School of Business electronic theses

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PURPOSE OF THE STUDY This thesis’ first empirical part studies determinants associated with the emergence of systemic banking crises. Low GDP growth, high inflation, low creditor rights, low GDP per capita and financial reforms are hypothesized to increase the probability of a banking crisis. I evaluate the determinants’ value in explaining 80 banking crisis around the globe by employing a multivariate logit model, exactly as in Demirgüc-Kunt and Detragiache (1997). This thesis’ second empirical part evaluates banking crises’ effects on fiscal cost and economic output by regressing each of these two dependent variables separately on a number of new or updated explanatory variables in an ordinary least squares (OLS) regression, exactly as in Demirgüc-Kunt and Detragiache (1997). This study provides new insights into the determinants and effects of banking crises with new and larger datasets and time frames as well as better and further developed variables. DATA From the database by Laeven and Valencia (2008) I obtain the core data on banking crises, consisting of 80 banking crises in a sample of 120 countries during the period of 1980 to 2005. From IMF’s IFS database and world economic outlook (WEO) I obtain the data for the remaining variables. The data finally consists of 2755 country-year observations for the empirical part I on the determinants of banking crises. For the empirical part II on banking crises’ effects, I obtain the complete data on 42 banking crises and their explanatory variables, during the period of 1970 to 2007, from the database by Laeven and Valencia (2008). RESULTS The findings of the study on determinants of banking crises show that low GDP growth, highly developed institutional and regulatory environments and high GDP per capita increase the probability of a banking crisis statistically significantly. This thesis updated the study of Demirgüc-Kunt and Detragiache (1997) and turned their results around. The findings of the second empirical part on banking crises effects show that a parallel currency crisis and explicit deposit insurances increase the economic output loss. French and Socialist law countries experience lower output losses but more frequent crises. As in Honohan and Klingebiel (2003), I also observe that government interventions result in higher fiscal costs. Additionally, higher fiscal expenditure was not found to reduce output losses, exactly as Claessens, Klingebiel, and Laeven (2003) conclude. However, foregone tax revenues due to output losses might also impact fiscal cost, as suggested by Reinhart and Rogoff (2008). Thus, any conclusion about the relationship between fiscal cost and output loss is difficult due to a possible endogeneity.