Boyd, John H. De Nicolò, Gianni Loukoianova, Elena
Year of Publication:
CESifo working paper Monetary Policy and International Finance 3134
We formulate a simple theoretical model of a banking industry that we use to identify and construct theory-based measures of systemic bank shocks (SBS). These measures differ from 'banking crisis' (BC) indicators employed in many empirical studies, which are constructed using primarily information on government actions undertaken in response to bank distress. Using both country-level and firm-level samples, we show that SBS indicators consistently predict BC indicators, indicating that BC indicators actually measure lagged policy responses to systemic bank shocks. We then re-examine the impact of macroeconomic factors, bank market structure, deposit insurance, and external shocks on the probability of systemic bank shocks (SBS) and on 'banking crisis' (BC) indicators. We find that the impact of these variables on the likelihood of a policy response to banking distress (as represented by BC indicators) is frequently quite different from that on the likelihood of a systemic bank shock (SBS). We argue that disentangling the effects of systemic bank shocks and policy responses is crucial in understanding the roots of banking crises. We believe that many findings of a large empirical literature need to be re-assessed.