Banking Crises and Economic Activity: Observations from Past Crises in Developed Countries*

Abstract

This paper examines twelve banking crises that occurred in developed countries between the 1970s and 1990s and highlights the macroeconomic adjustment paths experienced during these episodes. The banking crises were generally preceded by financial deregulation, which sparked rapid real credit growth and asset price inflation. During the booms, the lending standards of banks deteriorated and prudential supervision was inadequate. The most serious crises coincided with deep and prolonged slowdowns in economic activity, starting with falling credit growth and asset prices, followed by a sharp fall in investment and a slowing in consumption, partly offset by a rise in net exports. Governments responded with a range of policies to restore the health of the banking sector, along with monetary and fiscal stimulus. The paper concludes by comparing these past crises with the recent banking crises in the United States and parts of Europe, where the deterioration of lending standards appears to have been an important factor once again.