Banking Crisis and Financial Liberalization

Over the last two decades many developing countries have liberalized their financial system with the aim of improvement in the financial development and economic growth. While many countries enjoyed economic growth, some of them experienced rapid credit growth and some experienced financial (banking) crises. As a result, some attribute banking crises mainly to financial liberalization ( Kaminsky & Reinhart, 1999), while others include other macroeconomic variables such as exchange rate regimes. A greater part of the empirical literature focused on the impact of financial liberalization and exchange rate regimes on the likelihood of banking crises, however the literature, to the best of my knowledge, has ignored the impact of exchange rate regime on financial liberalization. The next section of the paper presents a critical analysis of one theoretical paper and two empirical studies of the causes of banking crises. The prospect topic for dissertation is discussed in Section III.
II. Critical Analysis
1. Amri,P.D., Prabha,A. and Wihlborg, C. 2014. What Makes High Credit Growth Harmful? Leverage, financial regulation and supervision, and banking crises.

The literature has identified credit expansions to the private sector as an important predictor of banking crises. Amri et al (2014) in their paper investigate the role of the private sector in triggering financial instability. Most financial crises were preceded by credit booms (eg. the Asian crisis in 1997-98 experienced rapid credit growth). However, the authors point out that only the minority of all credit booms are followed by a subsequent banking crises. They argue that high credit growth is more crises prone if the financial system is characterized by fragility and distorti...

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...s Angkinand & Willet (2011) attempt to investigate the impact of the exchange rate polices on the likelihood of banking crises. However, there is no empirical study attempts to investigate the two linkages together (financial liberalization and exchange rate policies) on banking crises. My main focus is to combine and extend the work of Angkinand et al. (2010) and Angkinand & Willet (2011) studying the impact of the different exchange rate policies on financial liberalization on the likelihood of banking crises in developing countries. I would conduct the study only on developing countries because they experience more banking problems than developed countries. For example, banks own larger share of the total financial assets in developing countries than advanced countries and regulatory and supervisory systems are less sophisticated in developing countries.