Banking Crises: The impact of Banking Crises on Public Debt

The effect of the last major banking crisis (Subprime) was catastrophic for everyone. Several economies were affected and showed a worsening of public debt in a short period of time. Therefore, the objectives of this dissertation were to explore banking crises` literature and to quantify, using an Ordinary Least Square regression, the impact of banking crises on Portugal's public debt. For the Portuguese case, the availability of data allowed the creation of a base with a time horizon between 1970 and 2015 (annual data). The regression results show that, for the Portuguese case, in the event of a banking crisis, the public debt will increase sharply. This result is important to current literature because despite all efforts to make the financial system robust, the possibility of a new banking crisis continues to exist. In addition, these phenomena can lead to unsustainable public debt, which can cause major disruptions to the economy as a whole. It is therefore suggested that more attention be paid to the policies of the financial system, streamlining legislation that could shield the country from having one of its banking institutions trigger a crisis and/or move forward with mechanisms to absorb the impact of an external crisis.