Why Are There So Many Banking Crises? The Politics and Policy of Bank Regulation

By Jean-Charles Rochet | Go to book overview

General Introduction and
Outline of the Book

The recent episode of the Northern Rock bank panic in the United Kingdom, with depositors queuing from 4 a.m. in order to get their money out, reminds us that banking crises are a recurrent phenomenon. An interesting IMF study back in 1997 identified 112 systemic banking crises in 93 countries and 51 borderline crises in 46 countries between 1975 and 1995, including the Savings and Loan crisis in the United States in the late 1980s, which cost more than S150 billion to the American taxpayers. Since then, Argentina, Russia, Indonesia, Turkey, South Korea, and many other countries have also experienced systemic banking crises.

The object of this book is to try and explain why these crises have occurred and whether they could be avoided in the future. It is fair to say that, in almost every country in the world, public authorities already intervene a great deal in the functioning of the banking sector. The two main components of this public intervention are on the one hand the financial safety nets (composed essentially of deposit insurance systems and emergency liquidity assistance provided to commercial banks by the central bank) and on the other hand the prudential regulation systems, consisting mainly of capital adequacy (and liquidity) requirements, and exit rules, establishing what supervisory authorities should do when they close down a commercial bank.

This book suggests several ways for reforming the different components of the regulatory-supervisory system: the lender of last resort (part 2), prudential supervision and the management of systemic risk (part 3), and solvency regulations (part 4) so that future banking crises can be avoided, or at least their frequency and cost can be reduced significantly.

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