Do Surges in International Capital Inflows Influence the Likelihood of Banking Crises? Cross-Country Evidence on Bonanzas in Capital Inflows and Bonanza-Boom-Bust Cycles

This paper asks whether bonanzas (surges) in net capital inflows increase the probability of banking crises and whether this is necessarily through a lending boom mechanism. A fixed effects regression analysis indicates that a baseline bonanza, identified as a surge of one s.d. deviation from trend, increases the odds of a banking crisis by three times, even in the absence of a lending boom. Larger windfalls of capital (two s.d. bonanzas) increase these odds by seven times. The joint occurrence of a bonanza and a lending boom raises the odds even more. Decomposing flows in FDI, portfolio-equity and debt indicates that bonanzas in all flows increase the probability of crises when the windfall takes place jointly with a lending boom; but only surges in portfolio-equity flows do so in the absence of a lending boom. Furthermore, emerging economies exhibit greater odds of crises after a windfall of capital