How does institutional quality respond to banking crises occurrences?

Robert Stewart () and Murshed Chowdhury ()
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Robert Stewart: University of Toronto
Murshed Chowdhury: University of New Brunswick

International Review of Economics, 2025, vol. 72, issue 2, No 8, 40 pages

Abstract: Abstract What is the interplay between banking crises and institutional quality? In the economic growth literature, institutional quality is an important growth parameter and banking crisis is a growth inhibitor. While studies have examined the effect of institutional quality on banking crises, the reverse relationship is less studied. In this study, we conduct a fixed-effects panel regression on over 100 countries, between 1996 and 2017, to investigate the response of institutional quality to banking crises. Our results indicate that banking crises have a general negative effect on institutional quality, with persistence. Banking crises disrupt financial and economic activity, which may engender social disregard for existing institutional arrangements due to income and welfare loss for households and firms. Banking crises also carry high fiscal costs, which increases public debt and may further crowd-out public spending on important institutional development programs, undermining institutional stability. Therefore, policy responses to banking crises need to account for institutional quality impact.

Keywords: Institutional Quality; Banking Crises; World Governance Indicators (WGI); High-Income Countries; Non-High Income Countries (search for similar items in EconPapers)
JEL-codes: E02 F33 G01 N20 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s12232-025-00496-9

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