The wide reach of the government's taxing powers and the productivity of public goods help to explain why sovereign debt crises can have dramatic impacts on the economy through anticipations of future fiscal measures. Similarly, the critical role that financial intermediaries play in allocating resources and administering payment systems would suggest that breakdowns in financial intermediation associated with banking crises would tend to have dramatic effects on the functioning of the economy as well. In this chapter, we will see that this is indeed the case. Like sovereign debt crises, banking crises have been both common in emerging and developing economies and especially severe in their macroeconomic effects. In this chapter, we will explore why banking crises happen, from both theoretical and empirical perspectives. When examining the empirical determinants of banking crises, we will consider both cross-country and case study evidence, as we did for sovereign debt crises in Chapter 25.

Figure 26.1 provides a recent compilation of the frequency of banking crises by Kroszner et al. (2007). There are two observations to take away from this figure. First, like sovereign crises, banking crises have not been infrequent. Second, the frequency of banking crises appears to have increased rather markedly after the late 1980s, when financial liberalization took hold in many emerging and developing economies. In the rest of this chapter, we will consider why this may have been so.