Do financial markets discipline future credit growth?

The frequency of major crises suggests that financial markets often fail to provide strong ex-ante warnings. However, they might exert a secondary form of discipline and prompt needed adjustments once a crisis has occurred. We test this hypothesis on credit growth, a frequent contributor to banking crises. In a sample of 72 banking crises from 1977 to 2010, we found that real credit growth fell substantially (relative to the average) by about 8% points from pre- to postcrisis. However, the strength of this effect varied across episodes. To explore mechanisms, we found that financial regulatory regimes tend to be strengthened.