Banking Crises and Investor Confidence: An Empirical Investigation

In addition to their direct effects, banking crises may decrease investor confidence; lead some investors to withdraw funds from the formal financial sector, and thereby exacerbate the impact of crises.  We quantify the effects of financial crises on investor confidence by studying the investment behavior of immigrants in the U.S. who vary in their exposure to systemic banking crises prior to arriving in the U.S.  We find that individuals who have experienced a systemic banking crisis in their countries of origin are 11 percentage points less likely to use banks in the U.S. compared to otherwise similar individuals from the same country that have not lived through a crisis. This finding is robust to including country-decade of migration fixed effects and other methods to address potential unobserved heterogeneity.  Consistent with the view that personal experience plays an important role in decision-making, we also find that the effects of living through a crisis are larger for individuals who are adults at the time of the crisis and for people who experience crises in countries without deposit insurance.