Almost every country in the world has sophisticated systems to
prevent banking crises. Yet such crises--and the massive financial
and social damage they can cause--remain common throughout the
world. Does deposit insurance encourage depositors and bankers to
take excessive risks? Are banking regulations poorly designed? Or
are banking regulators incompetent? Jean-Charles Rochet, one of the
world's leading authorities on banking regulation, argues that the
answer in each case is "no." In "Why Are There So Many Banking
Crises?," he makes the case that, although many banking crises are
precipitated by financial deregulation and globalization, political
interference often causes--and almost always exacerbates--banking
crises. If, for example, political authorities are allowed to
pressure banking regulators into bailing out banks that should be
allowed to fail, then regulation will lack credibility and market
discipline won't work. Only by insuring the independence of banking
regulators, Rochet says, can market forces work and banking crises
be prevented and minimized. In this important collection of essays,
Rochet examines the causes of banking crises around the world in
recent decades, focusing on the lender of last resort; prudential
regulation and the management of risk; and solvency regulations.
His proposals for reforms that could limit the frequency and
severity of banking crises should interest a wide range of academic
economists and those working for central and private banks and
financial services authorities.
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