The Political Economy of Banking Crises in Emerging Economies: An Econometric Analysis of Political and Institutional Indicators

This dissertation evaluates how selected political and institutional variables affect banking sector fragility. A Binary Times---Series Cross - Sectional (BTSCS) model is used to test the relationship between banking crises and partisanship, rule of law and government strength across thirty-five emerging economies from 1980 through 2009. The model also tests for interactive effects of the selected qualitative indicators and domestic credit expansion on incidences of banking crises. The question investigated is: How do the selected political and institutional variables affect banking sector stability in the face of rapid domestic credit expansion? Direct-effect testing suggests general support for the hypothesis that banking crises are more prevalent under left-wing and centrist governments than under right-wing governments. However, interactive effects indicate that party orientation does not have a substantive effect on banking crises during periods of rapid domestic credit expansion. The effect of strength of rule of law on banking crises is inconclusive. However, econometric testing indicates some support for the hypothesis that banking crises are less likely under stronger systems of rule of law. Finally, the results show a strong and substantive relationship between government strength and incidences of banking crises. The interactive effects provide further support by suggesting that under conditions of rapid domestic credit expansion, higher levels of government strength reduce the likelihood of banking crises.