In this paper, we provide evidence that banking industry volatility may exert a negative impact on growth in a more economically integrated world. By applying the augmented difference-in-difference framework of Rajan and Zingales (1998) to the cross-country cross-industry data developed by Ciccone and Papaioannou (2009), complemented by the Financial Development and Structure database of Beck et al. (2010), we show that over the 1980–1999 period the banking sector volatility, measured as the standard deviation of
the growth of private credit, has a negative impact on the growth of industries that are
more externally financially dependent, and this finding is robust to various sensitivity
tests. However, the detrimental growth effect of banking sector volatility disappears when the sample is restricted to the relatively placid 1980s. Compared to the 1980s, the 1990s are characterized by a more economically integrated world accompanied by more often unpredicted financial crises that disturb the banking sector. As such, our results imply that in a more economically integrated world, the stability of bank development may be important to long-run growth.