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The macroeconomic effects of banking crises: evidence from the United Kingdom, 1750–1938

Journal: Explorations in Economic History

Date: 2021

Author: Seán Kenny, Jason Lennard, John D. Turner

Abstract:
This paper analyses the macroeconomic effects of banking crises in the United Kingdom between 1750 and 1938. We construct a new annual chronology of banking crises, which we define as episodes of runs and panics combined with significant, geographically-dispersed failures and suspensions. Using a vector autoregression, we find that banking crises are associated with short, sharp and significant drops in economic growth. Using the narrative record to identify plausibly exogenous variation, we show that this finding is robust to potential endogeneity.

Link: Google Scholar

Background and Context

Research Focus

This study examines how banking crises affected the UK economy between 1750-1938, before the era of systematic bank bailouts.

Methodology

The researchers created a new chronology of UK banking crises based on bank runs, significant bank failures, and geographic spread of banking problems.

Data Analysis

Using vector autoregression models and historical records, the study analyzed how banking crises impacted GDP growth and other economic indicators.

Impact of Banking Crises on GDP Growth

  • Banking crises led to a sharp 2.7 percentage point decline in GDP growth in the following year
  • The economic impact was short-lived, with growth returning to normal after one year
  • No significant long-term growth effects were found beyond the initial impact

Comparison of Recessions With and Without Banking Crises

  • Recessions with banking crises saw larger output declines (-3.1% vs -2.1%)
  • Banking crisis recessions were shorter but had longer recovery periods
  • Recovery growth rates were slower following banking crises (3.9% vs 4.8%)

Impact on Different Economic Sectors

  • Industrial sector was most severely affected with a 4.5 percentage point decline
  • Services sector showed the most resilience with only a 1.6 percentage point decline
  • Agricultural sector saw moderate impacts of 3.0 percentage points

Financial Market Response to Banking Crises

  • Money supply growth fell sharply by 9.1 percentage points in the year following a crisis
  • Equity prices dropped by 6.0 percentage points immediately during crisis years
  • Financial markets showed recovery patterns after the initial shock

Contribution and Implications

  • First comprehensive study of UK banking crises effects from 1750-1938, providing insights into crisis impacts before modern bailout policies
  • Demonstrates that banking crises led to significant but short-lived economic contractions
  • Shows that industrial sectors were most vulnerable to banking crises, while services showed greater resilience

Data Sources

  • GDP Impact: Based on regression results reported in Section 3.2
  • Recession Comparison: Based on Table 3 showing recession characteristics
  • Sector Impact: Based on results reported in Section 3.3
  • Financial Impact: Based on results reported in Section 3.3 and Figure 5