PARTICIPANTS
Charles Calomiris, Stephen Haber, Michael Bordo, Michael Boskin, Howard Dickman, Darrell Duffie, Allan Meltzer, Monika Piazzesi, John Powers, George Shultz, Martin Schneider, John Taylor, Ian Wright
ISSUES DISCUSSED
Charles Calomiris and Stephen Haber discussed their book entitled “Fragile by Design: Banking Crises, Scarce Credit, and Political Bargains.”
Haber began the discussion by establishing some empirical facts about banking crises. Based on the definition of a “banking crisis” given in Laeven and Valencia (2010), these facts included: (1) since 1970 the majority of countries have had at least one banking crisis, with more than 10 countries having more than one banking crisis, (2) the list of countries experiencing multiple banking crises since 1970 includes many located in central Africa and Latin America, but also includes the United States, and (3) when sorted by income quartiles, groups of countries with high income appear to have high private bank credit, but within income groups there is great heterogeneity amongst countries in the amount of private bank credit extended. Haber also pointed out that only thirteen countries with a significant amount of private bank credit have not had a banking crisis, and that all of these countries are either island city states or democracies with anti-populist constitutions. From this, he and Calomiris concluded the type of political institutions in a country matters for the frequency of banking crises.
Calomiris then discussed how political institutions may matter and why stable and efficient banking systems appear to be so rare. He argued a number of property rights problems have to be mitigated for an effective banking system to exist, which requires government involvement. However, since governments simultaneously borrow from and regulate banks, enforce debt contracts and need political support of debtors, and distribute losses in the event of bank failure but need political support from depositors, inherent conflicts of interest exist when it comes to banks and government, which makes the property rights problems hard to solve. Calomiris then discussed a number of case studies illustrating his and Haber’s conclusion that banking systems are implicit partnerships between governments and private actors. He concluded by saying there is no way to remove politics from banking regulation and that positive improvement in banking systems is only possible within the constraints imposed by a society’s political institutions.
