How do bank competition, regulation, and institutions shape the real effect of banking crises? International evidence

This paper studies the influence of bank competition on the real effect of 36 systemic banking crises in 30 countries over the 1980–2000 period and how this influence varies across countries depending on bank regulation and institutions. We find that bank market power is not on average useful for mitigating the negative real effect of a systemic banking crisis. Market power promotes higher growth during normal times in industries that are more dependent on external finance but induces a bigger reduction in growth during systemic banking crises. We also find a country-specific effect depending on bank regulation and institutions. Stringent capital requirements and poor protection of creditor rights increase the benefits of bank market power for mitigating the negative real effect of a systemic banking crisis because bank market power has a positive effect on economic growth during both crisis and non-crisis periods in these environments. ► We analyze how bank competition, regulation, and institutions affect the real effect of banking crises. ► Bank market power does not mitigate, on average, the negative real effects of banking crises. ► Bank market power with stringent capital requirements foster growth during crisis periods. ► Bank market power with poor protection of creditor rights foster growth during banking crises.