Measuring the Severity of a Banking Crisis and Finding Its Associated Factors: How Are the Factors Different for Simple and Severe Banking Crises?

Abstract

This study measures the severity of a banking crisis by using its duration and the cost. Using this new methodology, we find that the factors associated with a severe banking crisis are not quite the same as those associated with a simple banking crisis. An ordered logit model and a large panel data set were used for this study. One of our major findings is that there exists a four-year time lag between an economic boom, or financial system liberalization, and the occurrence of a severe banking crisis in a country. This indicates that banking problems start much earlier than the time when they are revealed as banking crises. This study also finds that the lower the remains of a past banking crisis, the higher the probability of a severe banking crisis. It could be due to less-attentiveness of banking sector policy-makers with elapsed time. A high rate of inflation, existence of an explicit deposit insurance scheme, and a weak institutional environment are found to be common factors positively associated with both simple and severe banking crisis.

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