Why Are There So Many Banking Crises?: The Politics and Policy of Bank Regulation [Hardcover]

Jean-Charles Rochet (Author)

Book Description

Publication Date: January 3, 2008

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.

Editorial Reviews

Review

Among economists' explanations are moral hazard, ill-judged capital adequacy rules and the incompetence of supervisors. Jean-Charles Rochet, a leading authority on banking, argues the real problem lies with politicians who too often insist on rescuing insolvent banks for short-term reasons of their own. [W]hatever the verdict on the policy proposals, the book makes interesting reading in current circumstances. -- John Plender, Financial Times



The book provides an excellent introduction to the theory of banking regulation. . . . I can recommend the book to anyone interested in a formal, academic approach to banking regulation. The concise conclusions of the individual articles provide valuable ideas for changes in banking regulation. -- Bernd Brommundt, Financial Markets and Portfolio Management

From the Inside Flap

"Jean-Charles Rochet is one of the dedicated 'audacious pioneers' who have attempted to dissect with rigor, precision, and creativity some of the most elusive issues of financial (in)stability. It is pleasing to see his work presented in a unified, clear, and well-written form. A testament to his formidable contributions and remarkable insights, this book will guide researchers and students, as well as practitioners, into the future."--Dimitrios P. Tsomocos, Said Business School, University of Oxford

"Why are there so many banking crises? One answer is that so few economists of Jean-Charles Rochet's caliber have worked on the problem. Combining analytical and technical abilities, institutional knowledge, clear writing, and common sense to an outstanding degree, Rochet has produced a book that will benefit everyone who reads it."--Charles Goodhart, London School of Economics and Political Science

"This collection of important papers by Jean-Charles Rochet, one of the leading theoreticians of banking, should generate great interest."--George Kaufman, Loyola University Chicago

See all Editorial Reviews

Product Details

• Hardcover: 336 pages
• Publisher: Princeton University Press (January 3, 2008)
• Language: English
• ISBN-10: 0691131465
• ISBN-13: 978-0691131467
• Product Dimensions: 9.5 x 6.5 x 1.2 inches
• Shipping Weight: 1.2 pounds (View shipping rates and policies)
• Average Customer Review: 4.0 out of 5 stars  See all reviews (1 customer review)
• Amazon Best Sellers Rank: #1,157,161 in Books (See Top 100 in Books)
  • #63 in Books > Law > Business > Banking

Customer Reviews

Most Helpful Customer Reviews

8 of 9 people found the following review helpful:

4.0 out of 5 stars 3.5 Stars-Neglects the fundamental cause of bank failure-speculation, May 18, 2008

By 

Michael Emmett Brady "mandmbrady" (Bellflower, California ,United States) - See all my reviews
(VINE VOICE)    (REAL NAME)   

This review is from: Why Are There So Many Banking Crises?: The Politics and Policy of Bank Regulation (Hardcover)

This is an interesting,but incomplete,set of essays written by Jean-Charles Rochet and a number of co-authors which are based on the standard views of analyzing the banking industry's interest rate risk problems -asymmetric(incomplete or partial) information,adverse selection,moral hazard,and income gap(duration gap),value at risk models that seek to maintain bank capitalization levels in the face of banking industry attempts to minimize interest rate risk.Thus,"..improperly chosen risk weights induce banks to select inefficient portfolios and to undertake regulatory arbitrage activities that might paradoxically result in increased risk"(p.6).The alleged " solution " appears on p.250-"...adoption of "market-based" risk weights,i.e.,weights proportional to the systematic risks of these assets measured by their market betas..."(p.250).THe problem is that all of the essays are written on the misbelief that the normal probability distribution can be used to model risk.There is no attempt to deal with the equally important problem of uncertainty,in the sense of Keynes,Ellsberg and Knight,or the " wild " risk that Mandelbrot has shown is of paramount importance.The VAR models all assume normality,as do the beta results calculated from the CAPM .
The major objection is that,while the authors are aware that the commercial banks are continually attempting to sidestep the regulatory apparatus by " securitization",they don't draw the fundamental conclusion that was already arrived at by Adam Smith over 230 years ago-commercial banks can not be allowed to make loans to projectors(Keynes's stock and financial market speculators and rentiers),imprudent risk takers,and prodigals.If loans are extended to these categories of borrower,the result will be the destruction and waste of the aggregate savings of a nation.The depositors' money must only be loaned out to those individuals who will use the money loans to produce actual goods,services,and create jobs.Otherwise,the necessary investment needed intertemporally to maintain full employment and economic growth will not be forthcoming and the country will be subjected to severe economic problems-inflation,deflation,or stagflation.None of the essays reach this fundamental conclusion that follows from the ancient wisdom of Adam Smith.