Causes of banking crises: Deregulation, credit booms and asset bubbles, then and now

We examine similarities in the run-up to banking crises using two criteria for their predictability: i) the percentage of a specified number of years prior to a crisis correctly called; and ii) the percentage of true alarms of total alarms for a crisis. Using panel logit models we find that a banking crisis will be sparked by the collapse of a real asset bubble. While such bubbles are associated with popular stories of a new era and an increasingly deregulated financial system, in most cases, this would occur even in the absence of sustained surges of capital inflow, accumulation of public debt, low interest rate policies, or structural shocks. We also find that an increase in income inequality inflated the recent housing bubble. ► Similarities of the global financial crisis and historical banking crises examined. ► Bivariate and multivariate panel logit models are employed. ► Asset bubbles and credit booms demonstrate the most robust similarities. ► The growth of income inequality helped to inflate the recent housing bubble. ► Capital inflows contributed to the recent housing bubble, but not a primary factor.