Charles W. Calomiris
This chapter reviews the history of banking crises, with particular emphasis on the experience of the United States during the Great Depression. It considers the perspectives historical experience provide regarding the relevance of different theories of the origins of such crises, their consequences for the economy, their changing frequency over time, the potential role for lender-of-last resort assistance to ameliorate crises, and differences across countries in the propensity for crises.
Gerard Caprio Jr and Patrick Honohan
The history of banking around the world has been punctuated by frequent systemic crises. As with Tolstoy’s “unhappy families,” not all crises are the same; distinct roles have been played at different times by mismanagement, government interference, and macroeconomic shocks. This review identifies common features of crises in recent decades and describes how costly they have been in terms of their fiscal burden and the impact on macroeconomic growth. It proceeds to outline the conceptual issues identified by theoreticians and considers appropriate policy responses. Although the crisis that began in 2007 and the euro sovereign debt crisis are claimed to be mostly new, we find key elements that are painfully familiar in each. Brief lessons for regulation are provided.
Gustavo S. Cortes and Renato L. Marcondes
This chapter analyzes the origins and development of the Brazilian banking system from colonial times to the present day. It begins with a description of the first credit relationships before the existence of banks in colonial Brazil, followed by a discussion of the difficulties faced by the first banks established in the imperial period. It then presents a detailed discussion of domestic and foreign banks during the First Republican, and the key institutional changes that occurred during the Great Depression of the 1930s and the military regime after 1964. Later, it covers banking activities in the hyperinflation period up to the country’s stabilization in 1994. The chapter concludes with an analysis of the recent period and how the banking system endured the Great Recession of 2008–2010 and the recent Brazilian fiscal crisis that began in 2014.
This chapter examines Russia’s nonbanking financial markets. After a turbulent beginning in the 1990s the economy monetized fast in the 2000s, and the Russian equity markets have become one of the world’s best performers. Legislation and supervision improved, but fundamental problems remained. Markets lack generalized trust, there is a low confidence in the rule of law, and many Russian financial transactions are executed off shore. State-controlled entities dominate markets, and oil price leads market dynamics. Since 2008 the authorities have declared an ambitious goal of making Moscow an international financial center, and if the efforts are successful, it will help developing markets, institutions, and regulation. The 2008 crisis laid bare underlying weaknesses, including lack of long-term funding and drastic shifts in sentiment.
Anthony J. Evans
This chapter looks at the role of ignorance rather than incentive explanations (such as moral hazard) to explain the financial crisis in the United Kingdom. It uses empirical evidence to suggest that economic explanations should allow scope for the possibility of clusters of errors and explores the institutional factors that can create them. Specific attention is given to the concepts of regime uncertainty and big players, and how they accelerated the crisis. The epistemic function of prices is also discussed, as is the importance of calculation and recalculation during periods of financial turmoil. The chapter attempts to demonstrate that contemporary Austrian economics can provide important contributions to our understanding of business cycles—both in theory and in practice.
The Austrian theory of the business cycle provides a necessary but not sufficient framework for understanding the intertemporal discoordination that caused the housing boom and bust and the financial crisis of 2008. Artificially low interest rates after 2001, caused by central bank expansionary policy, encouraged long-term loans, and housing policy and institutions, especially Fannie Mae and Freddie Mac, channeled those funds into the real estate market. The ensuing boom facilitated the growth of exotic financial instruments premised on rising housing prices, all of which crashed when the intertemporal discoordination became clear. Once in a bust, Austrian economics, supplemented by public-choice theory and other parts of Virginia political economy, rejects expansionary fiscal and monetary policy as appropriate responses. Only market discovery processes in a sound monetary framework can reallocate the malinvestments of the boom.
Paul Rhode and Koleman Strumpf
The conventional wisdom is that political futures markets are a recent invention. However, such markets have a long history in many Western countries. This chapter traces the operation of political futures markets back to sixteenth-century Italy, eighteenth-century Britain and Ireland, nineteenth-century Canada, and twentieth-century Australia and Singapore. In the United States election betting was a common part of political campaigns in the pre-1860 period but over the post-1860 period became increasingly concentrated in the organized futures markets in New York City.
Stefano Battilossi, Alfredo Gigliobianco, Giuseppe Marinelli, and With The Cooperation Of Sandra Natoli and Ivan Triglia
In Italy's bank-oriented financial system, bank credit is the most important source of external finance for firms. The allocative efficiency of banks is therefore a critical element underlying the overall performance of the economy. This chapter focuses on credit allocation across industrial sectors with different growth opportunities, as revealed by stock market data. We constructed a unique database which includes annual data on bank credit to different sectors and data on listed firms from 1948 to 2009. We assume that average sectoral price/earnings ratios are a proxy for growth opportunities, and that an efficient allocation of credit takes into account the variation of such opportunities. Our results confirm the hypothesis that, after a good start in the Fifties and Sixties, the following two decades, characterized by an excess of regulation (mixed with robust doses of political interference), saw a decline in the performance of the banking system. We also find evidence that after the financial liberalization of the early Nineties the allocative efficiency (across sectors) of the banking system increased. The present structural difficulties of the Italian economy do not depend, therefore, on the ability of the banks to select the industrial sectors to which to lend money.
Ricardo Correa and Horacia Sapriza
Sovereign debt crises have occurred frequently over the past two centuries. In recent years, the timing of sovereign crises has coincided with or directly followed banking crises. The link between sovereigns and banks tightened as financial “safety nets,” which increased the contingent liability that the banking sector represents for the sovereign, became more common. This chapter analyzes the transmission channels between sovereigns and banks, with a focus on the effect of sovereign distress on bank solvency and financing. It then highlights the notable cost to the real economy of the close connection between sovereigns and banks. Breaking the “feedback loop” between these two sectors should be an important policy priority.