DP15025 The Cleansing Effect of Banking Crises

Author(s): Reint Gropp, Steven Ongena, Jörg Rocholl, Vahid Saadi
Publication Date: July 2020
Keyword(s): banking crises, cleansing effect, Productivity Growth, supervisory forbearance
JEL(s): G01, G21, G28, O43
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15025

We assess the cleansing effects of the recent banking crisis. In U.S. regions with higher levels of supervisory forbearance on distressed banks during the crisis, there is less restructuring in the real sector and the banking sector remains less healthy for several years after the crisis. Regions with less supervisory forbearance experience higher productivity growth after the crisis with more firm entries, job creation, and employment, wages, patents, and output growth. Supervisory forbearance is greater for state-chartered banks and in regions with weaker banking competition and more independent banks, while recapitalization of distressed banks through TARP does not facilitate cleansing.