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Taming Financial Development to Reduce Crises

May 13, 2019 | S. Ben Naceur, B. Candelon, Q. Lajaunie | IMF

This paper assesses whether and how financial development triggers the occurrence of banking crises. It builds on a database that includes financial development as well as financial access, depth and efficiency for almost 100 countries. Through estimation of a dynamic logit panel model, it appears that financial development, from an institutional dimension and to a lesser extent from a market dimension, triggers financial instability within a one- to two-year horizon. Additionally, whereas financial access is destabilizing for advanced countries, it is stabilizing for emerging and low-income ones. Both results have important implications for macroprudential policies and financial regulations.