Cross-Country Empirical Studies of Banking Crisis: A Spatial Durbin Model

Abstract

The paper studies the factors associated with the emergence of banking crises during the process of financial liberalization in a large sample of cross-countries in 1989-1997 using a spatial Durbin model in a panel data econometrics. The empirical results suggest that financial liberalization has the tendency to stimulate the banking instability in economies. Financial liberalization played a significant role in the transmission of the banking crisis to emerging market economies. In addition, the results indicate that tighter entry restrictions and more severe regulatory restrictions on bank activities boost bank fragility; these are consistent with the results obtained by Barth et al. (2004). Then we find evidence that the measures of bank regulation variables also contributed, either positively or negatively, towards the observed crisis outcomes, with poor institutional environment playing a particularly significant role. Besides we find that the impact of the determinants differ slightly between whole sample and emerging economies.

Keywords: Banking crisis, spatial Durbin model, financial liberalization, regulation, institutions