Banking crises have political roots according to the authors of 128th issue of BRE – CASE Seminar Proceedings, Charles W. Calomiris and Stephen H. Haber

„We recognize that politics is everywhere, but somehow we believe that banking crises are apolitical (…). We believe this because it is the version of events told time and again by central bankers and treasury officials, which is then repeated by business journalists and television talking heads”. With those words Calomiris and Haber begin their book, "Fragile By Design: The Political Origins of Banking Crises and Scarce Credit", which will be published in February 2014 by Princeton University Press. The authors oppose this popular belief and claim that it is precisely politics that determine the size and quality of the banking sector. “(…) politics that we see operating everywhere else around us also determines whether societies suffer repeated banking crises (as in Argentina and the United States), or never suffer banking crises (as in Canada). By politics we (…) mean the way that the fundamental political institutions of a society structure the incentives of politicians, bankers, bank shareholders, depositors, debtors, and taxpayers to form coalitions in order to shape laws, policies, and regulations in their favour— often at the expense of everyone else. In this view, a country does not “choose” its banking system: rather it gets a banking system that is consistent with the institutions that govern its distribution of political power”. This explains why the distribution of banking crises between the countries around the world is not accidental. “If such catastrophes were random events, all countries would suffer them with equal frequency. The fact is, however, that some countries have had many, whereas others have few or none”. The analysis of experiences of 117 countries from the period 1970-2010 shows that only 34 countries (29%) were completely free from banking crises, 62 countries experienced one crisis, in 19 countries 2 crises happened; the number of countries that experienced some form of banking crises was twice as big as the number of those with stable banking systems, and approximately 18% of the countries had a high propensity to crisis.

“If a stable banking system capable of providing stable access to credit to talented entrepreneurs and responsible households is such a good idea, then why are such systems so rare? How can it be that a sector of the economy that is highly regulated and closely supervised works so badly in so many countries?” they ask. Their research-based answer is as follows: “fragility of banks and the scarcity of bank credit reflect the structure of a country’s fundamental political institutions. The crux of the problem is that all governments face inherent conflicts of interest when it comes to the operation of the banking system, but some types of government—particularly democracies whose political institutions limit the influence of populist coalitions—are better able to mitigate those conflicts of interest than others”.

The text of this issue of BRE-Bank CASE Seminar Proceedings is a translation of the first chapter of a book by Charles W. Calomiris and Stephen H. Haber - „Fragile By Design”, titled “If Stable and Efficient Banks Are Such a Good Idea, Why Are They So Rare?”. Additionally, the publication includes details of the debate that took place after 128th BRE–CASE Seminar: The Political Origins of Banking Crises and Scarce Credit, during which Charles W. Calomiris was our special guest speaker.

The entire text of the publication (in Polish) can be downloaded here.