The impact of initial macroeconomic conditions on the fiscal costs and output losses of banking crises
The impact of initial macroeconomic conditions on the fiscal costs and output losses of banking crises

Summary/Abstract: Honohan & Klingebiel (2000), Claessens et al. (2004), Laeven & Valencia (2008a) note that many banking crises were triggered or exacerbated by unsustainable macroeconomic policies and exogenous macroeconomic conditions. Claessens et al. (2004) argue that initial conditions may affect the severity and the costs of banking crises. Laeven & Valencia (2008a) note that initial conditions of banking crisis are important because they may shape the market’s and policymaker’s response during the containment phase of banking crisis. The object of this paper is to summarize the studies investigating the relationship between costs of banking crises and initial macro and micro-indicators and to analyze the impact of initial conditions of crisis on the costs of banking crisis. The results of correlation analysis show that most of independent variables are statistically insignificant. The empirical results suggest that output losses[T, T+5] are larger in countries where private bond market and banking sector are better developed and credit boom on the onset of banking crisis is observed. The empirical findings of this study suggest that output loss[T, T+3] is larger in countries where fiscal balance to GDP ratio and banks financial intermediation level are higher and banks are less financial leveraged. The results also show that net fiscal costs are larger in countries where concentration in banking sector is lower. The results of this study suggest that initial conditions on the onset of banking crises have only little impact on the costs of banking crises.

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