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

By Jean-Charles Rochet | Go to book overview

Chapter One

Why Are There So Many Banking Crises?
Jean-Charles Rochet
1.1 Introduction
The last thirty years have seen an impressive number of banking and financial crises all over the world. In an interesting study, Caprio and Klingebiel (1997) identify 112 systemic banking crises in 93 countries and 51 borderline crises in 46 countries since the late 1970s (see also Lindgren et al. 1996). More than 130 out of 180 of the IMF countries have thus experienced crises or serious banking problems. Similarly, the cost of the Savings and Loan crisis in the United States in the late 1980s has been estimated as over USD 150 billion, which is more than the cumulative loss of all U.S. banks during the Great Depression, even after adjusting for inflation. On average the fiscal cost of each of these recent banking crises was of the order of 12% of the country's GDP but exceeded 40% in some of the most recent episodes in Argentina, Indonesia, South Korea, and Malaysia. Figure 1.1 shows the universality of the problem.These crises have renewed interest of economic research about two questions: the causes of fragility of banks and the possible ways to remedy this fragility, and the justifications and organization of public intervention. This public intervention can take several forms:
emergency liquidity assistance by the central bank acting as a lender of last resort;
organization of deposit insurance funds for protecting the depositors of failed banks;
minimum solvency requirements and other regulations imposed by banking authorities;
and finally supervisory systems, supposed to monitor the activities of banks and to close the banks that do not satisfy these regulations.

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