Financial development in the aftermath of banking crises

Gerdie Everaert and Lorenzo Pozzi

Journal of International Money and Finance, 2025, vol. 157, issue C

Abstract: This paper examines the dynamic impact of systemic banking crises on financial development. Causal effects are identified using a propensity-score-based method for time series and panel data. Specifically, to address the non-random nature of banking crisis onsets, we apply inverse propensity score weighting to create a quasi-random distribution of crisis and non-crisis episodes. The appropriate weights are derived from a banking crisis prediction model that accounts for financial development in the run-up to crises. Using data on banking crises and a comprehensive set of financial development indicators for 174 countries from 1980 to 2019, we present novel evidence demonstrating that banking crisis shocks have a persistent negative effect on financial development. This finding holds across multiple dimensions of financial development.

Keywords: Banking crises; Financial development; Panel data; Local projections; Inverse probability weighting (search for similar items in EconPapers)
JEL-codes: C23 F30 F40 G20 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:157:y:2025:i:c:s0261560625001305

DOI: 10.1016/j.jimonfin.2025.103395

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