rochet - why are there so many banking crises; the politics and policy of bank regulation (2007)

[...]... OF THE BOOK Why Are there So Many Banking Crises? Part 1 contains a nontechnical presentation of these banking crises and a first, easily accessible, discussion of how the regulatory–supervisory system could be reformed to limit the frequency and the cost of these crises The main conclusions of this part are the following: • Although many banking crises have been initiated by financial deregulation and. .. Microprudential policy is justified by the (presumed) 5 inability of small depositors to control the use of their money by bankers This is why most countries have organized deposit insurance funds (DIFs) that guarantee small deposits against the risk of failure of their bank 6 The role of bank supervisors is then to represent the interests of depositors (or rather of the DIF) vis-à-vis banks’ managers and shareholders... 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, 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. .. about the increasing complexity of banking activities and the impossibility for banking supervisors to monitor in detail these activities It is therefore legitimate to encourage monitoring of banks by professional investors and financial analysts as a complement to banking supervision Similarly, a notion of gradualism in regulatory intervention is introduced (in the spirit of the reform of U.S banking regulation, ... supervisors The plan of this article is the following I will start by studying the historical sources of banking fragility Then I will examine possible remedies: creation of a lender of last resort, and/ or deposit insurance combined with solvency regulations Then I will try to draw a few lessons from recent crises And finally I will conclude by examining the future of banking supervision 1.2 The Sources of. .. Xavier Freixas and Bruno Parigi, shows that the architecture of the financial system, and in particular the matrix of interbank relations has a large impact on the resilience of the banking system and its ability to absorb systemic shocks This paper is related to several important papers on the sources of fragility of the banking system, notably Allen and Gale (1998), Diamond and Rajan (2001), and Goodhart... monetary policy 1 1 After finishing this paper, I became aware of an article of Quintyn and Taylor (2002), also presented in the Venice Summer Institute of CESIfo (July 2002), that basically arrives to the same conclusions i i i i i i rochet — 2007/9/19 — 16:10 — page 23 — #35 i WHY ARE THERE SO MANY BANKING CRISES? i 23 • And finally the key to successful reform is independence and accountability of banking. .. Journal of Money, Credit and Banking 26:439–59 Peek, J., and E Rosengren 1995 Bank capital regulation and the credit crunch Journal of Banking and Finance 19:679–92 Pettway, R H., and J F Sinkey 1980 Establishing on site bank examination priorities: an early-warning system using accounting and market information Journal of Finance 35:137–50 Rochet, J.-C 2004 Rebalancing the 3 pillars of Basel 2 Economic Policy. .. Turkey, 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... i i rochet — 2007/9/19 — 16:10 — page 21 — #33 i i Chapter One Why Are there So Many Banking Crises? Jean-Charles Rochet 1.1 Introduction The last twenty 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 . 1. Why Are there So Many Banking Crises? Jean-Charles Rochet 21 1.1 Introduction 21 1.2 The Sources of Banking Fragility 23 1.3 The Lender of Last Resort 24 1.4 Deposit Insurance and Solvency Regulations. deposits against the risk of failure of their bank. 6 The role of bank supervisors is then to represent the interests of depositors (or rather of the DIF) vis-à-vis banks’ managers and shareholders. 7 •. iii — #3 ✐ ✐ ✐ ✐ ✐ ✐ Why Are there So Many Banking Crises? The Politics and Policy of Bank Regulation Jean-Charles Rochet PRINCETON UNIVERSITY PRESS PRINCETON AND OXFORD ✐ ✐ rochet — 2007/9/19