This innovative analysis investigates a complex issue of tremendous economic and political importance: what makes some countries vulnerable to banking crises, while others emerge unscathed? Banks on the Brink explains why some countries are more vulnerable to banking crises than others. Copelovitch and Singer highlight the effects of two variables in combination: foreign capital inflows and the relative prominence of securities markets in the domestic financial system. Foreign capital is the fuel for banks' potentially dangerous behavior, and banks are more likely to take on excessive risks when operating in a financial system with large securities markets. The book analyzes over thirty years of data and provides historical case studies of two key countries, Canada and Germany, each of which explores how political decisions in the 19th and early-20th centuries continue to affect financial stability today. The analyses in this book have crucial policy implications, identifying potential regulations and policies that can work to protect banking systems against future crises.
Author(s): Mark Copelovitch, David A. Singer
Series: Political Economy of Institutions and Decisions
Publisher: Cambridge University Press
Year: 2020
Language: English
Pages: 252
City: Cambridge
Cover
Front Matter
Political Economy of Institutions and Decisions
Table of Contents
List of Figures
List of Tables
Preface
Acknowledgments
1 The Politics and Economics of Financial Instability
Understanding Banking Crises: National Market Structure and International Capital
The Structure of National Financial Markets
The International Dimension: Global Capital
Summarizing the Argument
The Plan of the Book
2 Banking Crises, Capital Flows, and Financial Market Structure
Banking Crises in the Industrialized World
What Causes Banking Crises? Capital Inflows and Financial Market Structure
Capital Inflows: Net Flows
Capital Inflows: Gross Flows
Capital Inflows and Banking Crises
Financial Market Structure
Financial Market Structure and Banking Crises
Conclusion
3 Capital Inflows, Market Structure, and Banking Crises: Empirical Evidence
Determinants of Banking Crises in OECD Countries
Dependent and Independent Variables
Control Variables
Determinants of Banking Crises: Results
Determinants of Banking Crises: Robustness
Determinants of Banking Crises: Testing Alternative Explanations
Size of the Banking System
Bank Concentration
Partisanship and Legislative Majorities
Capital Inflows, Market Structure, and Banking Crises: How and Why?
Bank-Level Analysis: Capital Adequacy and Insolvency Risk
Results: Tier 1 Bank Capital and Commercial Bank Z-Scores
Conclusion
Data Appendix
4 O Canada? Unraveling the Mystery of Canadian Bank Stability
The Political Roots of the Canadian Banking Market
The Birth of a Modern Banking System
Political Origins of Canada’s Securities Markets
Canadian Capital Markets from 1900 to the Great Depression
The Great Depression: A Window of Opportunity
Closes for National Securities Regulation
Canada’s Underdeveloped Securities Markets Endure
Re-evaluating Canadian Bank Stability
Conclusion
5 Finanzplatz Deutschland: German Bank Stability and Its Decline
The Origins and Development of the German Financial System
German Banking in the Nineteenth Century: The Emergence of the Three-Pillar System
German Securities Markets in the Nineteenth Century
Political Unification and the Shift of German Finance to Berlin
Arrested Development: The Politics of German Securities Markets, 1870–1945
The Panic of 1873 and the Political Backlash
against Securities Markets
The 1896 Stock Exchange Law
The Interwar Era: The 1931 Financial Crisis
and Nazi Repression of Securities Markets
Postwar German Finance: Bank Dominance, Subordinate Securities Markets, Persistent Stability
Securities Markets: A Secondary Role in Postwar German Finance
Persistent Stability: The Absence of Systemic
Banking Crises in Germany, 1871–2008
Finanzplatz Deutschland: The Development of German Securities Markets, 1985–2000
The Frankfurt Coalition and the Impetus for Reform
Finanzplatz Deutschland Emerges
Re-evaluating German Banking Stability
Conclusion
6 Policy Responses: What to Do (and Not to Do) about Financial Instability
Global Imbalances: Should We Worry?
Problems with Alternative Domestic Structure Arguments
Regulation: What Kind, and by Whom?
Should Bank Capital Requirements Be Increased?
Should Countries Impose Capital Controls?
Too Big to Fail: Should We Break Up Large Banks?
Should We Re-introduce Glass-Steagall?
Who Should Regulate?
Concluding Thoughts
References
Index
Political Economy of Institutions and Decisions
