Why Are There so Many Banking Crises?

Abstract

The last 25 years have seen an impressive number of banking crises all over the world. These crises have renewed interest of economic research on the causes of fragility of banks and the possible remedies to it. The justifications and organisation of public intervention in the banking sector have also been put into question. This article builds on this recent research in order to understand better the causes of banking crises and offer policy guidelines for reform of regulatory and supervisory systems. The main conclusions are: •Although many banking crises have been initiated by financial deregulation and globalization, these crises were largely amplified by political interference. •Supervision systems face a fundamental commitment problem, analogous to the time consistency problem confronted by monetary policy. •The key to successful reform is independence and accountability of banking supervisors. (JEL E58, G 21)

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