The Impact of Conflict and Political Instability on Banking Crises in Developing Countries

By Ali Compaoré, Montfort Mlachila, Rasmané Ouedraogo, Sandrine Sourouema

February 28, 2020

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Ali Compaoré, Montfort Mlachila, Rasmané Ouedraogo, and Sandrine Sourouema. The Impact of Conflict and Political Instability on Banking Crises in Developing Countries, (USA: International Monetary Fund, 2020) accessed September 20, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

While there is an extensive literature examining the economic impact of conflict and political instability, surprisingly there have been few studies on their impact on the probability of banking crises. This paper therefore investigates whether rising conflict and political instability globally over the past several decades led to increased occurrence of banking crises in developing countries. The paper provides strong evidence that conflicts and political instability are indeed associated with higher probability of systemic banking crises. Unsurprisingly, the duration of a conflict is positively associated with rising probability of a banking crisis. Interestingly, the paper also finds that conflicts and political instability in one country can have negative spillover effects on neighboring countries’ banking systems. The paper provides evidence that the primary channel of transmission is the occurrence of fiscal crises following a conflict or political instability.

Subject: Banking, Banking crises, Commercial banks, Econometric analysis, Financial crises, Financial institutions, International trade, Logit models, Systemic crises, Terms of trade

Keywords: Banking crises, Banking crises in year, Banking crisis, Banking liquidity shortage, Banking turmoil, Commercial banks, Conflict, Countries matter, Economic growth, Experiencing banking crisis, Fiscal crises, Fiscal crisis, Global, Government crisis, Liquidity shortage, Logit models, Occurrence of a banking crisis, Occurrence of banking crisis, Political instability, Start of a banking crisis, State fragility index, Sub-Saharan Africa, Systemic banking crisis, Systemic crises, Terms of trade, Terms of trade, WP

Publication Details

Pages:

40
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/041
Stock No:

WPIEA2020041
ISBN:

9781513530055
ISSN:

1018-5941

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