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Banking Crisis vs. Credit Crunch? A Cross-Country Comparison of Policy Responses to Dilemmas in Banking Regulation

Published online by Cambridge University Press:  20 January 2017

Thomas Bernauer  and
Vally Koubi
Thomas Bernauer
Affiliation:
Swiss Federal Institute of Technology
Vally Koubi
Affiliation:
ETHZ and University of Bern, Switzerland
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Abstract

Restrictive policies aimed at reducing the likelihood of bank failure during recessions tend to increase the probability of a credit crunch. In this paper we infer governments' policy responses to this dilemma by studying the cyclical behavior of bank capital in 1369 banks from 28 OECD countries during the period 1992–98. We find significant differences across countries. In the US and Japan, bank capital is counter-cyclical, that is, the typical bank strengthens its capital base during periods of weak economic activity. In the other countries, there is no relationship between the level of macroeconomic activity and bank capital. From these findings we infer that severe banking crises in the US and Japan may have made policymakers there more vigilant towards “unhealthy” banks, even when this implies an increase in the risk of a credit crunch. In countries without such crisis experience, policymakers seem to be less concerned about future banking crises. Our results suggest that the strong push by the US for the 1988 Basle Accord may have been a reflection of this increased sensitivity. They also suggest that, to the extent business cycles do not develop in synchronicity across countries and policymakers respond differently to the banking crisis-credit crunch dilemma, current reforms of the Basle Accord, which are designed to tighten regulatory requirements, may encounter difficulties.

Keywords

RegulationBank CapitalCredit CrunchBanking CrisisRecessionBasle Accord
Type
Research Article
Information
Business and Politics , Volume 6 , Issue 2 , August 2004 , pp. 1 - 22
Copyright
Copyright © V.K. Aggarwal 2004 and published under exclusive license to Cambridge University Press 

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