Do banking crises improve democracy?

Abstract

We study the relationship between banking crises and the level of democracy. We use an event-study method on a sample of up to 129 countries over the period 1975–2010 featuring 94 systemic banking crises. We find that banking crises are followed by an improvement in democracy and report evidence suggesting that the relation may be causal. The bulk of the improvement takes place between 3 and 10 years after the banking crisis. The impact of a banking crisis is greater in non-democratic countries and when the banking crisis is severe. We explain this finding by the fact that banking crises create windows of opportunity to contest autocratic regimes.