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Foreign booms, domestic busts: The global dimension of banking crises

Ambrogio Cesa-Bianchi, Fernando Eguren Martin and Gregory Thwaites

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper provides novel empirical evidence showing that foreign financial developments are a powerful predictor of domestic banking crises. Using a new data set for 38 advanced and emerging economies over 1970-2011, we show that credit growth in the rest of the world has a large positive effect on the probability of banking crises taking place at home, even when controlling for domestic credit growth. Our results suggest that this effect is larger for financially open economies, and is consistent with transmission via cross-border capital flows and market sentiment. Direct contagion from foreign crises plays an important role, but does not account for the whole effect.

Keywords: Financial Crises; Global Credit Cycle; Banking; Financial Stability; Sentiment. (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-ifn, nep-mac and nep-opm
Date: 2017-01-24
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:86166

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