The Historical Effects of Banking Distress on Economic Activity

Falk Bräuning and Viacheslav Sheremirov

Current Policy Perspectives from Federal Reserve Bank of Boston

Abstract: The failures of several U.S. regional banks have stimulated discussions about the macroeconomic effects of a likely credit contraction triggered by the recent banking turmoil. Drawing on historical evidence from advanced economies, this study documents a sizable and persistent decline in output and rise in unemployment following non-systemic financial distress. The effects of a systemic banking crisis are two to four times as large. High corporate leverage exacerbates banking turmoil, whereas high bank capitalization and a relatively large share of market financing in corporate debt mitigate it. These channels approximately offset one another so that the estimates tailored to the current U.S. economy are in line with the average effect.

Keywords: banking distress; real economy; financial crises (search for similar items in EconPapers)
JEL-codes: E44 F30 G01 G21 (search for similar items in EconPapers)
Pages: 8
Date: 2023-05-25
New Economics Papers: this item is included in nep-ban, nep-fdg, nep-his and nep-mac
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