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Banking Crises without Panics

Journal: Quarterly Journal of Economics

Date: 20210201

Author: Baron, Matthew; Verner, Emil; Xiong, Wei

Abstract:
We examine historical banking crises through the lens of bank equity declines, which cover a broad sample of episodes of banking distress with and without banking panics. To do this, we construct a new data set on bank equity returns and narrative information on banking panics for 46 countries over the period of 1870 to 2016. We find that even in the absence of panics, large bank equity declines are associated with substantial credit contractions and output gaps. Although panics are an important amplification mechanism, our results indicate that panics are not necessary for banking crises to have severe economic consequences. Furthermore, panics tend to be preceded by large bank equity declines, suggesting that panics are the result, rather than the cause, of earlier bank losses. We use bank equity returns to uncover a number of forgotten historical banking crises and create a banking crisis chronology that distinguishes between bank equity losses and panics.

Link: Google Scholar

Key Findings

Banking Crises Without Panics

Large bank equity declines predict substantial credit contractions and output gaps even in the absence of banking panics. Bank equity crashes without panics predict 2.7% lower GDP and 3.5% lower credit-to-GDP after three years.

Panics Follow Bank Equity Losses

Banking panics tend to occur after substantial bank equity losses. On average, panics occur 7.5 months after bank equity has declined by 30%, suggesting panics are often the result rather than the cause of bank losses.

Early Warning Indicator

Bank equity declines serve as an early warning indicator, falling substantially before credit spreads spike and panics occur. Bank equity is more information-sensitive than credit instruments in detecting emerging banking sector problems.

Bank Equity Crashes and Economic Impact

  • Bank equity crashes without panics lead to 2.7% lower GDP after 3 years
  • Credit-to-GDP ratio declines by 3.5% in non-panic episodes
  • Panic episodes show even larger declines of 4.6% in GDP and 8.9% in credit-to-GDP

Timing of Bank Equity Crashes vs Panics

  • 74% of panics occur after bank equity crashes
  • Average lag of 7.5 months between bank equity crash and panic
  • Bank equity has typically lost 55% of its total decline before panic occurs

Distribution of Banking Crisis Types

  • 183 total banking crises identified in study (1870-2016)
  • 67% of crises involve both bank equity crashes and panics
  • 33% of crises feature bank equity crashes without panics

Contribution and Implications

  • Provides first systematic evidence that banking crises without panics can have severe economic consequences
  • Highlights importance of bank capital adequacy, not just preventing panics
  • Demonstrates value of bank equity returns as early warning indicator for policy makers
  • Creates new chronology of banking crises distinguishing between panic and non-panic episodes

Data Sources

  • Economic Impact Chart: Based on Table II regression results showing GDP and credit-to-GDP impacts
  • Timing Chart: Constructed from results in Table III showing average lag between equity crashes and panics
  • Crisis Types Chart: Derived from Table VII summary statistics of BVX Crisis List episodes