Political Regimes and Banking Crises: A Dynamic Latent Trait Approach
Politicians in democratic regimes seem to address banking crises in ways that differ markedly from choices made by politicians in authoritarian regimes. In particular, democracies seem less likely to engage in bank bailouts and to devote smaller fiscal transfers to restore domestic banking systems to solvency. These preliminary findings beg the question of whether democracies may suffer from banking crises that are qualitatively different from those that affect authoritarian regimes; in a nutshell, we may observe lower post-crisis spending in democracies only because these tend to confront banking crises of smaller magnitude. Unfortunately, existing banking crisis indicators are intrinsically unable to yield information about the extent of insolvency of a banking system. I build a reliable indicator of the extent of insolvency in national banking systems through a Bayesian dynamic latent trait approach that exploits dichotomous expert information on the occurrence of a crisis as well as information on credit available to the private sector, and use this indicator to carry out a preliminary test of differences in banking crises across political regimes.