Historical Banking Crises and the Rules of the Game

DECEMBER 7, 2009

Attended an interesting talk today: “Historical Banking Crises and the Rules of the Game” by Professor Charles Calomiris, Columbia Business School. Sporadic notes below. See also this Weaving History thread on Financial Crises.


  • One crisis with 20 different explanations. Need to sort these out a little.
  • If banks are uninsured then in a recession banks cut their supply of loans
    • Banks are facing losses, need to bulk up their balance sheet and can do it either by raising equity or cutting supply of loans. Former is hard so do the latter.
  • Crisis aren’t just inherent to human nature or capitalism. “Crisis propensity reflects politically determined rules of the banking game that are conducive to crises:”
    1. industry setup that determines exposure of banks to risk
    2. absence of decent (effective and incentive compatible) central-banking (NB: 2 isn’t a big problem w/o 1)
    3. subsidization of risk by govt policies
  • Panic = moments of severe sudden withdrawal that threatened the system. Observable variable: collective action by NY clearing banks
    • In US (19th and early 20th c.): 1857, 1873, 1877, 1893, 1907 [ed: missing at least 2 and may have got wrong I think]
    • All of 6 crises in US post civil war were all preceded by 50% increase in liabilities and 7% drop in stock market
    • Britain: 1825, 1836, 1847, 1857, 1866 then none for over a century
  • Solvency crisis: -ve net worth of failed bank > 1% of GDP
    • 140 examples since 1978
    • Rare in past: 4 in 1873-1913
    • Australia: 1893 (10%)
    • Argentina: 1890 (10%)
    • Norway: 1900 (3%)
    • Italy: 1893 (1%)
  • Literature has converged in last 20 years to agree that safety-net provision on balance increases instability (rather than reducing it)
  • Crucial reform in 1858 in UK following 1857 crisis. BoE would no longer intervene in bills market. In 1866 made good on this promise when largest bill discounter went bust (Overend and Gurney)
  • Crisis origins:
    • Loose money: CBs, flat yield curve … (but note not enough for a crisis on own)
    • Housing subsidies delivered by leverage. F&F have $1.6 trillion out of $3 trillion total subprime. $350 billion cost on F&F alone.
    • Huge buy-side agency problems
      • Lots of buy-side people buying poor quality material for clients facility by big race-to-the-bottom at ratings agency
    • Prudential regulation failure
  • Everyone smart knew there was a subprime crisis in mid-2006.
  • Long-term regulatory reforms
    • Micro-prudential reform: focus on measurement of risk
    • Credit rating agency reform
    • Resolution policy/TBTF Problems