A blessing in disguise? Banking crises and institutional change.

Weak economic growth is a contributing factor behind many banking crises. In this paper, we test whether banking crises cause long-term institutional change aimed at improving macroeconomic performance and thus indirectly reduce the risk of future crises. Our dataset consists of 22 developed and 34 developing countries covering the period from 1985 to 2009. The results show that banking crises cause institutional change if GDP growth is below potential growth during the crisis. Approximately 40% of the change in institutional quality during the considered period occurred after a banking crisis. These results hold for both developed and developing countries