In their new book, Fragile by Design, Columbia University professor Charles W. Calomiris and Stanford University professor Stephen H. Haber explore why banking systems are unstable in many countries, but not in others. For example, the United States has had 12 systemic banking crises since 1840, while Canada has had none.
These are just two of the countries profiled by the authors, who also look at the banking systems of Mexico, Brazil, and the United Kingdom. A historical, global perspective that accounts for the inextricable connection between banking systems and political orders leads to a holistic view of political economy as it affects finance.
Calomiris and Haber find chronic banking crises and scarce credit are not mere accident. Populist influences and the age-old competing interests of rural and urban constituents result in different structures to banking systems. Some countries' banking systems, such as that of the United States, are influenced by complex bargains struck with special interest groups. Other banking systems, such as England's, manage to rise above political constituencies.
The complex interplay of politicians, bankers, shareholders, and other interest groups determines who gets to be a banker, has access to credit, and pays for bank bailouts and rescues. Acknowledging that there are no banks without states and no states with banks (the title of Section One of the book), leads to a new understanding of banking crises and credit allocation.
To read the first chapter, If Stable and Efficient Banks Are Such a Good Idea, Why Are They So Rare?, click the link.
Image source: Chazen Institute