Freie Universität Berlin Inaugural-Dissertation zur Erlangung des akademischen Grades eines Doktors der Wirtschaftswissenschaft des Fachbereichs Wirtschaftswissenschaft der Freien Universität Berlin Learning from the Past to Predict the Future: Three Essays on Banking Crises vorgelegt von Daniel Dieckelmann, M.Sc. aus Aachen Berlin, März 2021 First supervisor: Prof. Dr. Max Steinhardt John-F.-Kennedy Institut Freie Universität Berlin Second supervisor: Prof. Matthew Baron, Ph.D. Johnson Graduate School of Management Cornell University Tag der Disputation: 13. Juli 2021 Koautorenschaft und Publikationen Der erste und zweite Essay dieser kumulativen Promotionsschrift wurden in Al- leinautoreschaft verfasst. Der erste Essay im zweiten Kapital wurde mit leicht reduziertem Inhalt und der zweite Essay im dritten Kapitel mit gleichem Inhalt in der Diskussionspapierreihe des Fachbereichs für Wirtschaftswissenschaften der Freien Universität Berlin unter den Nummern 2020/13 bzw. 2021/06 öf- fentlich zugänglich gemacht. Der dritte Essay im vierten Kapitel wurde in Koautorenschaft mit dem Zweitbetreuer der Dissertation Prof. Matthew Ba- ron, Ph.D. von der Cornell University verfasst und wurde in reduzierter Form als Buchkapitel veröffentlicht und ist zum Zeitpunkt der Publikation dieser Dissertation (Juli 2021) im Druck befindlich. Die offiziellen Literaturangaben lauten wie folgt: Dieckelmann, D. (2020). Cross-border lending and the international transmis- sion of banking crises. School of Business & Economics Discussion Paper, No. 2020/13. Freie Universität Berlin. Dieckelmann, D. (2021). Market sentiment, financial fragility, and economic activity: The role of corporate securities issuance. School of Business & Eco- nomics Discussion Paper, No. 2021/06. Freie Universität Berlin. Baron, M., & Dieckelmann, D. (2021). Historical Banking Crises: A New Da- tabase and a Reassessment of their Incidence and Severity. In Schularick, M. (ed.), Leveraged: The New Economics of Debt and Financial Fragility. Univer- sity of Chicago Press, forthcoming. Die Datenbank des vierten Kapitels und die Daten des dritten Kapitels stehen unter www.quantfinhistory.org zur Verfügung. In dedication and in deep gratitude to Iván Alves & in loving memory of my father. Contents List of Figures3 List of Tables4 Acknowledgments7 1 Introduction9 2 Cross-Border Lending and the International Transmission of Banking Crises 13 2.1 Abstract............................... 13 2.2 Introduction............................. 13 2.3 Cross-border bank lending and banking crises.......... 16 2.4 Methodology and data....................... 21 2.4.1 Dating banking crises.................... 25 2.4.2 The domestic model.................... 26 2.4.3 The exposure-based model................. 29 2.4.4 The combined model.................... 32 2.4.5 Evaluation.......................... 33 2.5 Results................................ 34 2.5.1 Out-of-sample performance................ 41 2.6 The Global Financial Crisis.................... 46 2.7 Conclusion.............................. 48 2.8 Appendix.............................. 52 3 Market Sentiment, Financial Fragility, and Economic Activity: The Role of Corporate Securities Issuance 59 3.1 Abstract............................... 59 3.2 Introduction............................. 59 3.3 Market sentiment and securities issuance............. 61 3.3.1 Approximating sentiment................. 62 3.3.2 Stock market sentiment.................. 66 1 2 CONTENTS 3.3.3 Credit market sentiment.................. 68 3.3.4 Theoretical background................... 72 3.4 Financial fragility and the credit cycle.............. 75 3.4.1 The credit-to-GDP gap................... 76 3.4.2 Predicting banking crises.................. 79 3.4.3 Out-of-sample analysis................... 83 3.5 Economic activity and recessions................. 86 3.5.1 Predicting recessions.................... 89 3.6 Conclusion.............................. 93 3.7 Appendix.............................. 95 4 Beyond Boom and Bust: Causes of Banking Crises, 1870 – 2016 111 4.1 Abstract............................... 111 4.2 Introduction............................. 111 4.3 Revisiting 150 years of banking crises............... 114 4.3.1 Dating banking crises.................... 115 4.3.2 Coding causes of banking crises.............. 116 4.4 Causes of banking crises...................... 119 4.5 Quantifying the changing nature of banking crises over time.. 124 4.6 Conclusion.............................. 130 4.7 Appendix.............................. 132 4.8 Narrative summaries and sources................. 163 5 Conclusion 337 Bibliography 339 Abstract 349 Zusammenfassung 351 List of Figures 2.1 Channels of international banking crisis transmission....... 17 2.2 The cross-border bank lending channel.............. 18 2.3 Cross-border claims at the onset of the Global Financial Crisis. 21 2.4 Behavior of indicator variables around crisis observations.... 29 2.5 Illustration of the exposure-based model............. 31 2.6 Recursive out-of-sample exercise of the combined model..... 44 2.7 Warning signals around the Global Financial Crisis....... 47 2.8 Policy maker’s preference trade-off................ 53 2.9 Marginal effects of the combined model.............. 54 3.1 Corporate securities issuance relative to GDP, 1900–2020.... 64 3.2 Equity and high yield bond shares, 1900–2020.......... 65 3.3 Sentiment proxies for equity and credit markets, in-sample, 1901– 2020................................. 71 3.4 Private credit-to-GDP gap, 1900–2019.............. 78 3.5 Event studies around banking crises................ 82 3.6 Out-of-sample prediction for the 2008 Subprime Crisis...... 85 3.7 Sentiment and the business cycle, 1900–2020........... 86 3.8 Event studies around recessions.................. 90 3.9 Additional measure: equity-issuance-to-price ratio, 1900–2020. 95 3.10 Credit-to-GDP gap comparison, 1952–2019............ 96 4.1 Credit booms gone bust and other banking crises........ 121 4.2 Sensitivity of bank equity to real factors over time........ 126 4.3 Sensitivity of bank equity to financial factors over time..... 127 3 4 LIST OF FIGURES List of Tables 2.1 Data availability and crisis observations.............. 23 2.2 Confusion matrix.......................... 27 2.3 Independent variables........................ 28 2.4 Domestic model estimations.................... 35 2.5 Exposure-based model....................... 36 2.6 Combined model estimations.................... 38 2.7 Out-of-sample cross-validation results............... 43 2.8 Out-of-sample recursive results.................. 45 2.9 Exposure-based model with asset and liability-side channels.. 52 2.10 Dating of banking crises...................... 55 2.11 Interacting the exposure index with financial development... 57 3.1 Estimating the stock market sentiment proxy.......... 67 3.2 Estimating the corporate credit market sentiment proxy..... 69 3.3 Financial fragility and market sentiment............. 80 3.4 Model estimation for out-of-sample exercise, 1900–2005q1.... 84 3.5 Wald tests for Granger causality.................. 88 3.6 Recessions and market sentiment................. 91 3.7 New historical U.S. data...................... 97 3.8 Data construction and sources................... 108 3.9 VAR model estimation: Market sentiment, credit, and economic activity............................... 110 4.1 Coding framework for causes of banking crises.......... 117 4.2 Causes of banking crises, all types................. 120 4.3 Cross-tabulation of credit booms and financial flow shocks... 123 4.4 Country coverage.......................... 132 4.5 Causes of banking crises, all with widespread bank failures... 133 4.6 Causes of banking crises, only pure panics............ 134 4.7 Causes of banking crises...................... 135 5 6 Acknowledgments I would have never been able to accomplish this dissertation without the help of others. First and foremost, I would like to thank my first supervisor Prof. Dr. Max Steinhardt for taking me on as his Ph.D. student after a time of uncertainty and insecurity before he joined our department. For your encour- aging words in times of need and a structured supervision I am very grate- ful. I would also like to express my gratitude to my second supervisor Prof. Matthew Baron, Ph.D. who introduced me to the world of cutting-edge re- search in macro-finance and on banking crises and who provided me with the opportunity to study at Cornell University in New York. Albeit having been a challenging period in my life, the time spent in the United States has helped me to improve my research and my understanding of the discipline substan- tially. Thank you for your continuous availability and for your constant and very constructive feedback. I am also thankful to Dr. Till Strohsal who mentored my dissertation in the first difficult one-and-a-half years and gave me valuable feedback when it was most desperately needed. Gabi Bodmeier and Dr. David Bosold are the heart and the soul of the Graduate School and I am deeply indebted to both for countless occasions of help and guidance, as well as for always a smile and a kind conversation. My colleagues Ana Frost and Yevhenii Usenko have supported me in a million different ways through their friendship to me. Thank you for having my back. The staff of the Institute for New Economic Thinking in New York City was so kind as to host me and to welcome me into their midst from day one for which I am incredibly thankful. I would also like to thank Dr. Iván Alves to whom I dedicate