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The Cleansing Effect of Banking Crises

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 recapitalisation of distressed banks through TARP does not facilitate cleansing.

14. July 2020

Authors Reint E. Gropp Steven Ongena Jörg Rocholl Vahid Saadi

Professor Reint E. Gropp, PhD

About the author

Professor Reint E. Gropp, PhD

Reint E. Gropp joined the Institute as President in November 2014. He is also a Professor of Economics at the Otto von Guericke University Magdeburg. He is Associate Fellow of the Center for Economic Policy Research (CEPR) and serves as consultant for various central banks.

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