This study measures the severity of a banking crisis by using its duration and the cost. Using this new methodology, we find that the factors associated with a severe banking crisis are not quite the same as those associated with a simple banking crisis. An ordered logit model and a large panel data set were used for this study. One of our major findings is that there exists a four-year time lag between an economic boom, or financial system liberalization, and the occurrence of a severe banking crisis in a country. This indicates that banking problems start much earlier than the time when they are revealed as banking crises. This study also finds that the lower the remains of a past banking crisis, the higher the probability of a severe banking crisis. It could be due to less-attentiveness of banking sector policy-makers with elapsed time. A high rate of inflation, existence of an explicit deposit insurance scheme, and a weak institutional environment are found to be common factors positively associated with both simple and severe banking crisis.
Khan, A.H. and Dewan, H. (2010) Deposit Insurance Scheme (DIS) and Banking Crises: A Special Focus on Less Developed Countries. Journal of Empirical Economics, 41, 155-182. http://dx.doi.org/10.1007/s00181-010-0438-8
Demirgúc-Kunt, A. and Detragiache, E. (2002) Does Deposit Insurance Increase Banking System Stability? An Empirical Investigation. Journal of Monetary Economics, 49, 1373-1406.
Khan, A.H., Khan, H.A. and Dewan, H. (2013) Central Bank Autonomy, Legal Institutions and Banking Crisis Incidence. International Journal of Finance and Economics, 18, 51-73. http://dx.doi.org/10.1002/ijfe.456