This paper examines the characteristics of downturns and subsequent recoveries following past
banking crises in OECD countries as well as evidence of any effects on potential output growth. It is
differentiated from previous analyses because it makes use of OECD measures of the output gap and
potential output. Downturns following banking crises are found to be more protracted with larger output
losses and disproportionate falls in housing and business investment. The recovery is typically more muted
with exports providing a disproportionately large positive contribution. Evidence regarding possible effects
on potential growth of a banking crisis is mixed. The banking crisis in Japan was followed by a
deterioration in potential growth partly due to a worsening in productivity performance which may be
related to the protracted nature of the banking problems and the resulting misallocation of capital.
Following the Nordic banking crises, which were resolved more quickly, there was no deterioration in
productivity performance, although there was a temporary deterioration in potential growth which is
mostly explained by an increase in the structural unemployment rate, which in turn may reflect the
interaction of an exceptionally severe downturn with structural labour market rigidities.
