Financial Liberalization and Financial Fragility

Enrica Detragiache () and Asli Demirguc-Kunt

No 1998/083, IMF Working Papers from International Monetary Fund

Abstract: A study of 53 countries during 1980-95 finds that financial liberalization increases the probability of a banking crisis, but less so where the institutional environment is strong. In particular, respect for the rule of law, a low level of corruption, and good contract enforcement are relevant institutional characteristics. The data also show that, after liberalization, financially repressed countries tend to have improved financial development even if they experience a banking crisis. This is not true for financially restrained countries. This paper’s results support a cautious approach to financial liberalization where institutions are weak, even if macroeconomic stabilization has been achieved.

Keywords: WP; financial liberalization; liberalization dummy; liberalization process; bank assets; franchise value; banking crises; financial development; Financial sector development; Real interest rates; Commercial banks (search for similar items in EconPapers)
Pages: 36
Date: 1998-06-01
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Citations: View citations in EconPapers (241)

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Working Paper: Financial liberalization and financial fragility (1998)
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