This study investigates the relationship between banking crises, financial supervision and institutional veto players in an empirical study consisting of 65 advanced and developing countries from 1976-2005. While the literature relating banking crises and supervision is extensive, discussions of precisely how domestic political institutions influence the design of banking supervision have not been commonplace. We test whether these political institutions which reflect checks and balances affect the probability of a banking crisis, by way of shaping the quality of a country's financial supervisory policies. We find a significant and negative relationship between banking crises probabilities and the strength of financial sector supervision. Our results highlight the important role of financial regulation and supervision in reconciling the benefits of a liberalised financial system (ie enhanced economic growth) with its costs (ie increased financial fragility).In the past three decades, banking crises have stricken countries both rich and poor alike with troubling frequency. From 1970 to 2007, the world witnessed 124 episodes of banking crises (Table 1), with an average output loss totalling 30% of gross domestic product (GDP), 44 of which involved bailouts with an average fiscal cost of 15% of GDP. 1 The recent global financial crisis may be the most severe yet, but it is not an exception.According to International Monetary Fund (IMF) estimates, 2 global economic output in the wake of the contemporary crisis contracted by 1% in 2009, and the forecast for world growth in 2010 is but a modest 3.1%, appreciably lower than the 5.2% recorded in 2007. Given the severity of these losses, how can we formulate appropriate policy and regulatory responses? The question is a propos because the global financial crisis of

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Credit markets play a crucial role in promoting economic well-being. 1 Studies have shown that financially developed economies tend to grow faster compared to those that are less developed financially. However, rapid credit expansions have also led in many instances to financial turmoil, including the Nordic crises in the late 1980s, the 1997-1998 Asian Financial Crisis, the 2008 Global Financial Crisis and more recently, Argentina (2018). Given the substantial costs that have been imposed by

This paper tests one aspect of whether financial markets can provide strong discipline over domestic macroeconomic policies by looking at the behavior of credit markets following financial crises. While financial markets often fail to give strong warning signals before a crisis, at times they might still provide a secondary form of discipline by helping to force needed economic adjustments once a crisis has broken out, as witnessed by the euro crisis. In this paper we present a test of this hypothesis with respect to the rate of credit growth, a frequent contributor to financial crises. Using a sample 58 banking crisis episodes from 1977 to 2010,we find that after banking crises on average rates of credit expansion fall substantially and financial regulation and supervision is strengthened. However, there is a substantial degree of regional and within-region differences in these discipline effects and for a sizeable minority of cases there is no evidence of discipline effects. We also find that both democracy and the presence of post crisis IMF programs are associated with larger drops in the rate of credit creation from pre to post crisis periods.