Credit Boom and Banking Crisis

The profound influence of the 2008 financial crisis has renewed interests in the financial instability hypothesis of Minsky, which attributes financial crisis to credit-intensive booms. This paper investigates the relationship between credit growth and the probability of a banking crisis based on country-level panel data. We use two data sets, one containing data on 14 OECD countries covering the period from 1870 to 2008 from Schularick and Taylor (2012), and the other containing data on global countries from 1969 to 2017 from the World Bank. We discover a U-shaped relationship between credit growth and the likelihood of banking crises, with the statistical relationship being more pronounced for developing countries. Furthermore, the above relationship is influenced by the existence of bank deposit insurance, with developed and developing countries exhibiting distinct patterns. Specifically, the existence of a deposit insurance system weakens resilience of the banking system in developing countries with weak institutional environments; whereas such a financial safety net does not make advanced economies more vulnerable to banking crises