DISCLAIMER: Staff Discussion Notes (SDNs) showcase policy-related analysis and research being developed by IMF staff members and are published to elicit comments and to encourage debate. The views expressed in SDNs are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

We investigate the effect of financial liberalization on the probability of a banking crisis in economies with poor transparency. We construct a model with imperfect information where banks cannot distinguish between aggregate shocks and government's policy on one hand, and firms' quality, on the other. Thus, a sequence of positive shocks or non-transparent policy causes banks to increase their credit above the optimal level given the underlying value of the firms. Once banks discover their large exposure, they are likely to rollover bad loans rather than declare their losses. This delays the crisis, but increases its magnitude. Empirical investigation using data on 56 countries from 1977 to 1997 supports the theoretical model. We find that the probability of a crisis is higher in the period following financial liberalization, significantly so in countries with poor transparency.

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Gurgur (2019) Voice or public sector management? An empirical investigation of determinants of public sector performance based on a survey of public officials,

Gurgur (2019) Voice or public sector management? An empirical investigation of determinants of public sector performance based on a survey of public officials,

Predicting CurrencyMarkets have had limited success predicting crises and Fluctuations and Crises might do better by drawing on private information . .~~~~~~~~~~~~~~~~available tO resident Do Resident Firms Have an

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