The Recovery Gap: Bank Equity, Credit, and Output after Financial Crises

Banking crises leave a persistent recovery gap between bank shareholder wealth, credit, and production. Across 119 crises in 39 countries, these dimensions occupy different positions relative to their pre-crisis levels in 57.1% of episodes at year five. In 96 crises with nearby quiet-period references in the same countries, mismatch is 58.3% after crises and 20.5% in the quiet periods. Bank equity alone remains below its earlier level while credit and output attain theirs in 32.3% and 12.5%, respectively. Among the 110 crises with complete bank and nonfinancial total returns, bank equity underperforms nonfinancial equity by 19.1 log percentage points during the crisis year and a further 27.9 points over the following five years. Restoration also depends on the initial loss distance. Among 40 crises initially damaging both bank equity and output, the 30-point difference in two-year restoration combines a −41.25-point distance contribution with a +11.25-point realized-path contribution. Requiring attainment in both final years preserves the distance disadvantage and yields a 35-point restoration gap. Regaining economic scale leaves substantial growth-path losses: within the same 31 episodes with credit and output at their old levels but bank equity below, 26 fall short of GDP growth continuation and 25 fall short of credit continuation. In the 69 episodes with unemployment data, 38 of the 57 whose GDP regains its earlier level still have higher unemployment. Economic activity resumes at its earlier scale while bank shareholder wealth and prior expansion paths remain incompletely restored.