The Real Effects of Banking CrisesFinance or Asset Allocation Effects? Some International Evidence

Abstract

This paper analyzes whether the declining rate of economic growth that follows an episode of banking crisis is motivated by a reduction in the amount of credit available (finance effect) or by a worsening in the allocation of investable resources (asset allocation effect). We use a sample of more than 2,500 industrial firms from 18 developed and developing countries that were involved in 19 systemic banking crises over the 1989-2007 period. The results show that banking crises negatively affect firms� intangible investments, and this intensifies the economic downturn. The negative growth effect is stronger in countries with highly developed financial systems and institutions. Quantitatively, the negative impact of the asset allocation effect during banking crises is larger than the finance effect.