We employ a unique framework to quantify the net effect of financial liberalization on banks’ total factor productivity (TFP) growth through a decomposition analysis of two effects: a positive direct effect of financial liberalization on bank TFP growth; and a negative indirect effect operating through a higher propensity to systemic banking crisis. The empirical decomposition is based on a sample of 1,530 banks operating in 88 countries over the period 1999-2011. We find that the net effect of financial liberalization on bank TFP growth is positive: the direct positive effect outweighs the negative one. An important policy implication flows from these findings.
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- Financial liberalization
- Banking crisis
- Systemic risk
- Bank productivity
- Total factor productivity
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