Banking Fragility and Financial Crises

Abstract

The history of banking crises grows richer with each passing decade, indeed with each passing year. Theories abound: the inherent instability of fractional reserve systems, systemic shocks that overwhelm risk management defenses, myopic optimism, a failure to regulate enough, too much regulation (creating moral hazard), a failure of regulators, a failure of bankers (due to greed, which stands in apposition to the "greed is good" school of thought), and so forth. This Review Essay considers alternative theories with a fresh motivation from Charles Calomiris and Stephen Haber’s book, "Fragile by Design: The Political Origins of Banking Crises & Scarce Credit."

Keywords: banks, fragility, financial crises, game of bank bargains, regulation

JEL Classification: G21, G28