Fragile By Design The Political Origins of Banking Crises and - - PowerPoint PPT Presentation

Fragile By Design

The Political Origins of Banking Crises and Scarce Credit Charles W. Calomiris and Stephen H. Haber Cass Business School, February 27, 2014

Fact 1: Systemic Banking Crises are Endemic

Figure 1 .1 The Frequency of System ic Banking Crises, 1 9 7 0 to 2 0 1 3 Tw o or More Crises 1 8 % One Crisis 5 3 % Zero Crises 2 9 %

Why do banking crises happen?

A big shock? (it is true that shocks coincide with crises) Inherent fragility of banks? (bank liquidity transformation is unique; financial firms without

• paque assets and short-term liabilities don’t have

crises like banks) But these cannot be sufficient answers to the question because, in some times and places, crises are relatively absent despite big shocks and the presence of abundant bank credit.

Variation over Time and Space

Some times were remarkably crisis-free worldwide (1874-1913) despite the presence of banks and abundant provision of bank credit. The period 1980-2013 is an unprecedented crisis pandemic. Even the Great Depression doesn’t come close to the current era. Some countries have been crisis-free: Canada, in spite of being a volatile commodity exporting country, has never suffered a severe banking crisis, while the US has suffered 17.

Is It Regulation?

There is a lot of evidence in favor of that view, particularly for explaining how the combination of generous public safety nets for banks, without effective prudential regulation, leads to moral hazard and adverse selection problems. This also is corroborated by analysis showing that bank risk taking (e.g., leveraging) has increased dramatically

• ver time.

But that just begs the question: where did the wave of protection without adequate prudential regulation come from? Why have some countries avoided it?

Our View: Banks are Fragile By Design

In many, but not all, countries, sub-groups form political alliances to use the banking system as a tool to extract public subsidies at the expense of other groups. This is accomplished through a process we call the Game of Bank Bargains, and it happens both in autocracies (where banking is a key part of what is sometimes called “crony networks”) and in democracies that are susceptible to populist capture. Banking systems are especially attractive as tools because it can be hard to identify the subsidies that flow from safety net policies, or favored access to credit (they are often not “on-budget”)

Credit scarcity has a similar explanation

Bank credit has been shown to be very helpful for promoting growth and reducing inequality. The basic tools of banking have been known since the mid-18th century. Yet many countries are credit supply-constrained. Abundant credit is rare because the access to credit is also a politically determined outcome in the Game of Bank Bargains.

Fact 2: Scarce credit is not randomly distributed either (note the relationship between stable democracies and credit provision)

Figure 1 .2 Average Private Credit from Deposit Money Banks as a Percent of GDP, 1 9 9 0 to 2 0 1 0 , by W orld Bank I ncom e Classifications

Low I ncom e Countries Mean= 1 1 % Low er- Middle I ncom e Countries Mean= 2 2 % Mexico Brazil Upper Middle I ncom e Countries Mean= 3 8 % U.S.A. Canada High I ncom e Countries Mean= 8 7 % U.K.

0% 20% 40% 60% 80% 100% 120% 140% 160% 180%

• D. R. Congo

Chad

• Cen. Afri. R

ep. Myanmar Malawi T anzania Gambia Haiti Benin Mali T

• go

Nepal Sudan Y emen Zambia Syria Solomon Isl Bhutan Swaziland Cote d'Ivoire Senegal Sri Lanka P hilippines C ape Verde Honduras Fiji E gypt Morocco Gabon Botswana P eru Suriname

• Dom. R

ep. Iran Costa R ica Uruguay T unisia Chile Jordan Thailand E

• q. Guinea

T

• rin. & T
• b.

Bahrain Greece Barbados Macao

• S. Korea

Belgium Italy Singapore Denmark Malta Iceland P

• rtugal

Ireland Luxembourg U.K. Japan Switz

Source: W orld Bank Financial Structure Database, Septem ber 2 0 1 2 update. Note: For reasons of readability, all country nam es not show n on X axis.

Our Framework

1. Banking systems are implicit partnerships between governments and private actors. 2. Partnership arise from strategic interactions (the “Game of Bank Bargains”), which operates according to the logic of politics, not the logic of efficiency. 3. It governs entry, competition, who gets credit, the pricing of credit, and the allocation of losses when banks fail.

4. Governments choose “bad” rules of the game because what the winning coalition wants can only be achieved under sub-optimal rules.

5. Who is in the controlling partnership varies across countries and within countries over time--because who is in the partnership and how much they can get from banks depends on each country’s system and rules.

How many crisis-free, abundant-credit countries? What attributes shared?

Singapore Malta Hong Kong, China Australia Canada New Zealand

Half of these are small island or city states (politically homogeneous). The other half are democracies that have a history of anti- populist constitutions.

How many high crisis, low credit countries are there--and what do they have in common?

High crisis, especially low credit: Chad, Democratic Republic of the Congo. High crisis, low credit: Argentina, Bolivia Brazil, Cameroon, the Central African Republic, Colombia, Costa Rica, Ecuador, Kenya, Mexico, Nigeria, the Philippines, Turkey, and Uruguay. How many of these 16 countries have been stable democracies since 1970? Only 2: Colombia, Costa Rica.

What patterns are suggested?

Non-democracies are systematically less likely to have stable and efficient banking systems. Being a democracy is not, per se, a solution to endemic banking crises.

Being a democracy is not the solution to endemic banking crises

Num ber of System ic Banking Crises Since 1 8 4 0 , Canada and the USA

12 2 4 6 8 1 0 1 2 1 4 USA Canada

Canadian stability is not a symptom of lower levels of bank credit

Figure 8 .1 Ratio of Com m ercial Bank Private Credit to GDP, Canada and the United States, 1 9 1 0 - 2 0 1 0

Canada USA 0% 10% 20% 30% 40% 50% 60% 70% 80% 1910 1913 1916 1919 1922 1925 1928 1931 1934 1937 1940 1943 1946 1949 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 Source: Historical Statistics of Canada, Bank of Canada Statistical Review, Bank of Canada Review; Federal Reserve, All Bank Statistics, Bureau of Economic Analysis, Banking and Monetary Statistics, FDI C website. Canada series excludes foreign lending. Credit as Percent of GDP

Issues addressed by our country studies

Why are stable, efficient banking systems so rare (why do political bargains need to create fragile banking systems)? Why do democracies generally do better? Why do some democracies do better than others? Through what mechanisms do political institutions affect banking system outcomes?

The key Constraints of the Game: All banking systems must address three property rights problems

1. Majority shareholders, minority shareholders, and depositors must be protected from expropriation by the government, or compensated for it. 2. Depositors and minority shareholders must be protected from expropriation by majority shareholders, or compensated for it. 3. Majority shareholders, depositors and minority shareholders must be protected from expropriation by debtors, or compensated for it.

Solving these problems requires government, but governments have inherent conflicts.

1. They simultaneously borrow from banks and regulate them. 2. They enforce debt contracts but need the political support of debtors. 3. They distribute losses in the event of bank failure, but they need the political support of depositors

Constraints => Fragility

There are a finite number of feasible ways to arrange banking in a way that satisfies the property rights constraints and that serves the interests of the winning political coalition. That explains why banking systems often perform badly: they are performing as well as they can under the constraints defined by the allocation of political power, and the logic of property rights.

A basic taxonomy of regimes and banking systems

Regime Government Banker-Government Partnership Banking System Outcomes Chaos None None None No State Absolute Power None None Poverty Trap Centralized Rent Creating & Rent Narrow Credit, Strong State Sharing Network Locally Stable Autocracy Weakly Centralized Inflation Tax Sharing between "Float" Banking Mid-Strength State Oligarchy and Autocrat Local Oligarchies Little or No National Chartering Small, Fragmented Weak State Liberalism Competitive Banking with Taxation Broad Credit, Stable Powerful State Democracy Welfare State Moves Banks Limited role for Banks Mid-Strength State Populism

• ut of the Line of Fire

Politically Determined Credit Broad Credit, Unstable Powerful State

Figure 1 .1 A Taxonom y of Regim es and Banking System s

To show how political institutions and banking systems co-evolve we…

Look at what actually happened in five countries from the late 17th century to the present The United Kingdom The United States Canada Mexico Brazil

Our five cases exemplify the possible states of the world, and explain dynamic paths from one to an other

England: Initially a crony system based on rent-sharing; later a system based on competitive banking with taxation, then a disused banking system, then a global powerhouse. The USA: Initially based on crony rent sharing; but dominated by populist banking since the 1820s; first a rural populist alliance, later (after 1990) an urban populist one. Canada: Competitive banking with taxation. Mexico: No banking at all until 1880s, then crony banking or chaos until 1990s; increasingly competitive and stable since democratization. Brazil: Inflation tax banking from 1808 to 1994 (intermittent); increasingly competitive and stable since democratization.

England vs. Scotland

• Glorious Revolution and William III’s battle against

Louis XIV…continuing war with France until 1815.

• Financing needs of sovereign defined and

constrained English banking rules (BofE monopoly rights, other companies). Liberalization post-1825.

• But not Scotland (most innovative bank system in

the world – branching, note clearing, lines of credit, interest-bearing deposits – as well as abundant credit deployed in diverse uses, lower risk of failure).

• Pax Britannica: Expansion of suffrage in 1832, Bank

reforms of 1826, 1833, 1844 make England’s banks like Scotland’s.

Britain over time

• Victorian banking success.
• Rise of the welfare state under the Liberal Party.
• Wars again supplant private bank credit.
• Postwar nationalization: slow growth, inflation.
• The Rise of Thatcher; the Big Bang.

U.K. Germ any

0% 25% 50% 75% 100% 125% 150% 175% 200% 225% Percent of GDP Source: W orld Bank ( 2 0 1 2 ) .

Figure 5 .4 Private Credit by Deposit Money Banks, as Percent of GDP United Kingdom and Germ any, 1 9 6 0 to 2 0 1 0

The United States

A brief history of the U.S. Banking System.

• 1. Populism versus liberalism at the outset.
• 2. The government--large banker partnership
• f the early republic.
• 3. Hamilton’s undoing. The unit banker-

agrarian populist partnership of 1830-1980.

• 4. The government--large banker--urban

populist partnership of 1980 to the present

Populist outcome in the U.S.: 27,000 banks, but almost no branches

The Peculiar Structure of the U.S. Banking System , 1 9 2 0 ( A System of Tens of Thousands of Banks, but alm ost no Branches)

5,000 10,000 15,000 20,000 25,000 30,000

Banks Branches

Num ber of Banks and Bank Branches

The death of the unit banker-agrarian populist coalition

The Number of Banks and Branches in the USA, 1920-2010

Number of Banks Ratio of Branches per Bank (right axis)

5,000 10,000 15,000 20,000 25,000 30,000

1920 1923 1926 1929 1932 1935 1938 1941 1944 1947 1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

Number of Banks

2 4 6 8 10 12 14

Ratio of Branches Per Bank

What changed?

• The agrarian-unit bank coalition was quite

robust – it survived the Civil War, the banking reform movement c. 1910 in response to the Panic of 1907, and the Great Depression.

• Five influences that unwound it: (1)

demography, (2) technology (ATMs) and court decisions, (3) domestic disintermediation, (4) loss of global market share, and (5) crises of 1980s.

American political institutions replaced

• ne rent-sharing system with another

“We support the NationsBank acquisition of BankAmerica because…they will make credit work for low and moderate income people and they will work with the community institutions.”

• -George Butts, President of ACORN Housing,

from his testimony to the Federal Reserve Board in support of the acquisition of BankAmerica by NationsBank, July 9 1998.

The Deal in a Nutshell

Megabanks are created with benefits of market power, TBTF, scale and scope efficiencies, weak prudential regulation. Benefits are shared with urban activist groups via contractual agreements that reward their support in merger hearings. GSEs are cajoled to purchase junk by subsidized funding and weak prudential regulation, and are pushed to debase underwriting standards for everyone.

The curious coalition between emerging megabanks and activist groups

Figure 7 .2 Cum ulative Value of CRA Agreem ents Betw een Banks and Activist Groups, 1 9 7 7 - 2 0 0 7 ( in Billions of

$ 1 4 Billion $ 5 7 9 Billion $ 8 6 7 Billion

$0 $100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: National Com m unity Reinvestm ent Coalition, CRA Com m itm ents ( 2 0 0 7 ) , pp. 1 1 - 1 7 . Billions of Dollars

These deals only capture a subset of all CRA transactions

Figure 7 .1 Cum ulative CRA Com m itm ents, 1 9 7 7 - 2 0 0 7

$ 4 3 Billion $ 1 .3 Trillion $ 4 .6 Trillion

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 $4,500 $5,000 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: National Com m unity Reinvestm ent Coalition, CRA Com m itm ents ( 2 0 0 7 ) , p. 8 .

These deals could only work if special purpose banks (Fannie and Freddie) were required to buy these loans

Figure 7 .3 HUD Loan Repurchase Mandates for Fannie and Freddie, 1 9 9 2 - 2 0 0 8

Low and Moderate I ncom e Lending Special Affordable (very low incom e) Lending Underserved Area Lending 0% 10% 20% 30% 40% 50% 60% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source Pinto ( 2 0 1 1 ) , pp. 7 6 , 8 7 , 1 0 4 , 1 0 5 . Note: Fannie and Freddie actual loan purchases m et these goals. Percent of Loans Purchased

In which it was possible to borrow without collateral?

Figure 7 .4 Percent of Hom e Purchases in the United States w ith a Dow npaym ent of Three Percent or Less, 1 9 8 0 -2 0 0 7

0.3% 0.5% 10.0% 14.3% 40.0% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 1980 1990 1999 2003 2007 Source: Pinto ( 2 0 1 1 ) , pp. 2 4 -2 5 .

Canada’s government-banker partnership

1. Banking policy centralized in the national government; Senate is appointed, and voting is non-proportional. 2. It was therefore not possible to build US-style coalitions in Canada. 3. In Canada, populist banking proposals are always beaten back: Canada has had a system of a few large banks since 1817, subject to effective regulation.

• 4. The limits imposed on the Canadian partnership by

the franchise (the unusual nature of Canadian bank charters).

Why did Canada make this choice?

British government’s overarching goals: promote growth, immigration, and avoid revolution. Special challenges: Canadian geography and preexisting French population (the enemy within). Solution: Canadian constitutional structure (evolution since 1840).

Democracies: Three Main Conclusions

• 1. As everywhere, banks require active encouragement of state.

Expropriation risk is low, but banks will only provide credit if government financing needs permit it (England vs. Scotland).

• 2. In more populist democracies, (the U.S.), bank regulation is

used as a political tool to favor some (unless other policies make that unnecessary (the UK). Instability is tolerated as the price for the benefits that is extracted by controlling banking

• regulation. In liberal democracies (Canada) it is difficult to form

coalitions to favor a subset of the population, so stable and abundant bank credit are much more likely.

• 3. Regulatory failures – e.g., the decision not to permit nationwide

branch banking in the United States prior to the 1990s, or the Fed’s permissive approach to bank mergers in the 1990s – are

• utcomes of political bargains. This implies that the prospects

for regulatory reform are often bleak.

Autocracy’s Outcomes

• Chaos or near chaos (no way of constructing a

lasting equilibrium).

• Crony networks as a “long-run” rent-sharing
• equilibrium. Mexico under Diaz, and later under

the PRI.

• Inflation tax banking. Why extract rent so

inefficiently? Brazil.

Mexico: Authoritarian Governments = Expropriation Risk

1. 1820s-early 1880s: expropriate banks 2. Porfiriato: networks to limit expropriation risk, limited entry necessary to compensate for risk 3. Revolution: expropriate banks

• 4. 1920s to 1970s: allow banks to shift default risk to

taxpayers as compensation

• 5. 1970s-1980s: expropriate banks
• 6. 1991-95, limit entry, limit capital at risk by

permitting leveraged buyouts and fictitious capital as compensation

• 7. 1997 to present: little expropriation risk, foreign

bank capital not fictitious

The Porfirian solution: segmented monopolies

Figure 7.1 The Mexican Banking System, 1897-1913

Number of Banks Bank Assets 5 10 15 20 25 30 35 1897 1898 1899 1900 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911 1912 1913 Source: 0% 5% 10% 15% 20% 25% 30% 35% 40% Bank Assets as Percent of GDP

Bank shareholders earned rents

Banks lent mostly to their own directors

• Percent of non-government loans made to banks’
• wn boards of directors:
• Banamex 1886 to 1901 100%
• Mercantil de Veracruz 1898-1906 86%
• Coahuila, 1908

72%

• Durango, 1908 51%
• Mercantil de Monterrey, 1908

31%

• Nuevo León, 1908 29%

The entire system depended on the maintenance of a stable, centralizing authoritarian government

The post-revolutionary solution: government owned banks

Figure 7 .2 The Sources of Credit in Mexico, 1 9 2 5 -

Credit from Commercial Banks Credit from Development Banks Credit from Financieras 0% 5% 10% 15% 20% 25% 30%

1925 1927 1929 1931 1933 1935 1937 1939 1941 1943 1945 1947 1949 1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979

Source: Instituto Nacional de Estadística Geografia e Informatica, Estadísticas Históricas de México, 2009.

The same credibility problem reemerged in the privatization of 1991 => leveraged buyouts and a banking crisis

The new solution under democracy: foreign banks as credible partners

Foreign Banks' Share of the Mexican Market ( As Percent of Assets) , 1 9 9 1 -2 0 1 1

Foreign Merger or Acquisition Banks Foreign Greenfield Banks 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Haber and Musacchio 2 0 1 2

A brief history of Brazilian banking

1. Initial conditions and the fundamental political institutions of Brazil. 2. The political constraints on taxation, but the power to charter. 3. The answer: Inflation tax banking since 1808. 4. Inflation’s endogenous acceleration helps to usher in democracy. 5. Populist democracy, the end of inflation tax banking, and partial private banking, with government banks as employment-creation machines.

The Defining Characteristic: Inequality

I ncom e I nequality Around the W orld, 1 9 7 0

Brazil

• S. Africa

Philippines Mexico 10 20 30 40 50 60 70 80

B u l g a r i a C z e c h Y u g

• s

l a v i a T a i w a n H u n g a r y L u x N Z e a l a n d P

• l

a n d A l g e r i a I n d

• n

e s i a I n d i a A u s t r a l i a C h i n a A r g e n t i n a C a n a d a E g y p t N

• r

w a y J a p a n U K K

• r

e a , S P a k i s t a n U S A S p a i n A u s t r i a S w e d e n V e n e z u e l a G r e e c e S r i L a n k a F r a n c e I r e l a n d G e r m a n y B a r b a d

• s

U g a n d a I r a n D e n m a r k I t a l y P a n a m a B a h a m a s T u n i s i a T h a i l a n d P h i l i p p i n e s S e n e g a l C

• l
• m

b i a E l S a l v a d

• r

I v

• r

y C

• a

s t M a l a w i E c u a d

• r

M a l a y s i a J a m a i c a Z a m b i a N i g e r i a S . A f r i c a Z i m b a b w e P e r u M

• r
• c

c

• M

e x i c

• B

r a z i l K e n y a

Source: SW I I D, Gross Household I ncom e Gini ( pre-tax, pre-transfer) .

The roots of Brazilian inequality are found in plantation slavery

Figure 1 0 .3 Black Population as Percent of Total Population, New W orld Societies circa 1 8 2 5 -6 0

0% 10% 20% 30% 40% 50% 60% U.S. North (1860) Spanish America (1825) U.S. South (1860) Brazil (1825) Source: Engerm an and Sokoloff ( 1 9 9 7 ) .

The basic choice facing all Brazilian Governments since 1808

• 1. Tax the rich (but they will resist, or leave)
• 2. Tax the poor through inflation (there are

limits to this approach, as 1980s showed).

• 3. Have a poor, weak state with relatively

heavy dependence on inflation taxation.

Pedro I Mean 9 .5 %

Note issues

• f B. do Bras I I

W ar w ith Paraguay

Pedro I I Mean 4 .1 % Old Republic Mean 4 .1 % Vargas Mean 5 .9 % Vargas Disciples Mean 2 2 .6 %

• 20%
• 10%

0% 10% 20% 30% 40% 50% 60% 70%

1822 1825 1828 1831 1834 1837 1840 1843 1846 1849 1852 1855 1858 1861 1864 1867 1870 1873 1876 1879 1882 1885 1888 1891 1894 1897 1900 1903 1906 1909 1912 1915 1918 1921 1924 1927 1930 1933 1936 1939 1942 1945 1948 1951 1954 1957 1960 1963

Source: 1 8 2 2 to 1 8 7 0 data are 3 year averages, based on: Lobo ( 1 9 7 8 ) ; Catão ( 1 9 9 2 ) ; Lees et al. ( 1 9 9 0 ) ; Brazil, Ministerio do Trabalho, I ndustria e Com ércio ( 1 9 4 6 ) . All of these series w ere retrieved from the I PEA w ebsite.

Figure 1 2 .1 I nflation in Brazil, 1 8 2 2 -1 9 6 3

Post-Estado Novo Populist Governm ents Military & Transition Governm ents Populist Dem ocracy

0% 500% 1000% 1500% 2000% 2500% 1946 1948 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Source: I PEA w ebsite.

Figure 1 2 .2 I nflation in Brazil, 1 9 6 4 -2 0 1 1

How can credit intermediaries

• perate under hyper-inflation?

Answer: If inflation runs at 100%, and the government decrees that checking accounts pay 0%, and that banks have to maintain large deposit reserves, banks get out of the intermediation business. They go into the “float” business.

The Division of the Brazilian Inflation Tax, 1947-1987

Figure 1 1 .X The I nflation Tax in Brazil, as Percent of GDP, 1 9 4 7 -1 9 8 7

Portion of Inflation Tax Captured by Government Portion of Inflation Tax Captured by 1 2 3 4 5 6 7 8 9

1 9 4 7 1 9 4 8 1 9 4 9 1 9 5 1 9 5 1 1 9 5 2 1 9 5 3 1 9 5 4 1 9 5 5 1 9 5 6 1 9 5 7 1 9 5 8 1 9 5 9 1 9 6 1 9 6 1 1 9 6 2 1 9 6 3 1 9 6 4 1 9 6 5 1 9 6 6 1 9 6 7 1 9 6 8 1 9 6 9 1 9 7 1 9 7 1 1 9 7 2 1 9 7 3 1 9 7 4 1 9 7 5 1 9 7 6 1 9 7 7 1 9 7 8 1 9 7 9 1 9 8 1 9 8 1 1 9 8 2 1 9 8 3 1 9 8 4 1 9 8 5 1 9 8 6 1 9 8 7

Source: Lees, Botts, and Penha Cysne ( 1 9 9 0 ) , pp. 3 8 -3 9 .

Did democracy bring credit intermediation in Brazil?

Not as much as other democracies, because:

• 1. Populist democracies make it easy for

debtors to expropriate banks.

• 2. Populist democracies use banks to maintain

full employment, not connect entrepreneurs with savers.

The largest banks in Brazil are still government-owned--and they’re in the full employment business

Bank Type % of Assets Banco do Brasil Govt 1 8 % I tau Private 1 6 % Bradesco Private 1 3 % BNDES Govt 1 2 % Caixa Econom ia Fedl Govt 1 1 % Top 5 as % of all Banks 7 1 %

Broad Policy Takeaways

1. Banks require active encouragement of the

• state. There is no getting politics out of bank
• regulation. Politics is baked in, and that

explains why few countries achieve abundant and stable bank credit. 2. Debates about “more versus less” regulation are a distraction. Better to ask who is in charge of regulation, with what limits? 3. Change is possible, but only within the constraints imposed by a society’s political

• institutions. (e.g., The USA cannot chose to

have the Canadian banking system).