Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/340837 
Year of Publication: 
2026
Series/Report no.: 
Kiel Working Paper No. 2320
Publisher: 
Kiel Institute for the World Economy (IfW Kiel), Kiel
Abstract: 
Financial liberalization is often seen as a way to deepen credit markets and stimulate economic growth, but it may also fuel credit booms that end in crisis. We construct a new cross-country database of banking regulation policies covering 21 regulatory indicators for 18 advanced economies since World War II. We distinguish liberalizations that directly relax constraints on credit supply from broader financial reforms. Liberalizations that directly affect credit supply lead to substantial expansions in private credit. Credit expansion is concentrated in non-tradable sectors and is not accompanied by higher interest rates or credit spreads in the short run, consistent with an outward shift in credit supply. Real GDP rises over the following 2 to 4 years, but the gains are temporary. On average, GDP returns to trend in the medium run, and there is an increase in the risk of financial crisis and worse downside growth outcomes. Only liberalizations that directly expand credit supply generate these boom-bust dynamics. Based on these estimates, financial liberalization is welfare-improving for coefficients of relative risk aversion below 7.2, a moderately high value.
Subjects: 
banking regulation
financial liberalization
bank lending
growth
banking crises
JEL: 
E44
G01
G21
G28
N20
O43
Document Type: 
Working Paper

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