Abstract - Banking Crises, Financial Dependence, and Growth (with L. Laeven and D. Klingebiel)
This paper investigates the growth impact of banking and financial crises on industries with different levels of dependence on external sources of finance. We analyze data from 36 developed and developing countries that have experienced financial crises during the last quarter century to examine whether the effect of a financial crisis on externally dependent sectors varies with the depth of the financial system. We find that sectors highly dependent on external finance tend to experience a substantially greater contraction of value added during a crisis in deeper financial systems than in countries with shallower financial systems. A one standard deviation increase in private credit would increase the decline in growth in value added between the crisis and pre-crisis period by 1.3 percent for the average financially dependent industry, which is a substantial deterioration compared to the mean decline in growth between these two periods of 3.5 percent. We hypothesize that the deepening of the financial system allows sectors dependent on external finance to obtain relatively more external funding in normal periods, so a crisis in such countries would have a disproportionately negative effect on externally dependent sectors.
University of Chicago