We investigate whether banking crises affect individuals’ subjective wellbeing (SWB) in eighteen European countries between 1980-2011. We address the potential endogeneity of banking crises by exploiting spatial and temporal differences in banking crises episodes. We find negative, robust, pronounced and highly persistent effects for events prior to 2007. The 2007-2008 crash lowered SWB in countries that had previously experienced a credit boom. Individuals living in regions hosting financial centres suffer bigger losses. These effects extend beyond changes in macroeconomic factors, wealth and fiscal policies: they are hidden psychological costs. We suggest these may reflect an increase in Knightian uncertainty.
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