Recent macroeconomic events have reinvigorated research in financial crises, namely systemic banking crises. While theoretical and empirical research on the causes and leading indicator of banking crises is vast, empirical literature on the cost of such crises is sparse. This paper addresses that void in the literature. Utilizing a new database compiled by the IMF on financial sector reforms, the correlation between financial sector liberalization and the severity of systemic banking crises is examined. The aspect of financial sector liberalization with the strongest correlation with the severity of systemic banking crises is the level of banking supervision and prudent regulation. It is found that higher levels of banking supervision is negatively correlated with output losses due to the banking crisis. Weaker evidence is found for the aspects relating to credit controls, entry barriers, privatization, and security markets. Additionally, reforms are not shown to be significantly correlated with more or less severe banking crises. Results are robust to changes in assumptions made during the calculation of the output loss figures.
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