Financial Liberalization and Financial Fragility

By Enrica Detragiache, Asli Demirgüç-Kunt

June 1, 1998

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Enrica Detragiache, and Asli Demirgüç-Kunt. Financial Liberalization and Financial Fragility, (USA: International Monetary Fund, 1998) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

A study of 53 countries during 1980-95 finds that financial liberalization increases the probability of a banking crisis, but less so where the institutional environment is strong. In particular, respect for the rule of law, a low level of corruption, and good contract enforcement are relevant institutional characteristics. The data also show that, after liberalization, financially repressed countries tend to have improved financial development even if they experience a banking crisis. This is not true for financially restrained countries. This paper’s results support a cautious approach to financial liberalization where institutions are weak, even if macroeconomic stabilization has been achieved.

Subject: Banking, Banking crises, Commercial banks, Financial crises, Financial institutions, Financial markets, Financial sector development, Financial services, Real interest rates

Keywords: Bank assets, Banking crises, Commercial banks, Financial development, Financial liberalization, Financial sector development, Franchise value, Liberalization dummy, Liberalization process, Real interest rates, WP

Publication Details

Pages:

36
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1998/083
Stock No:

WPIEA0831998
ISBN:

9781451850512
ISSN:

1018-5941

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