Haber Asobancaria.ppt [Read-Only]

Banking Crises, Credit, and
Political Institutions
Stephen Haber
Stanford University
Presentation at ASOBANCARIA
Medellín, Colombia
April 4, 2013
Caveat Lector
All of the material in this presentation is the result of work
that I have coauthored with a number of distinguished
colleagues.
Stephen Haber, Noel Maurer, and Armando Razo, The
Politics of Property Rights (Cambridge University Press
2003);
Stephen Haber, Douglass North, and Barry Weingast,
Political Institutions and Financial Development (Stanford
Press, 2008);
and most especially Charles Calomiris and Stephen Haber,
Fragile by Design: Banking Crises, Scarce Credit, and
Political Bargains (Princeton University Press,
forthcoming).
---Buy our new book!
Lets start with the facts: Systemic
Banking Crises are Endemic
Scarce credit is not randomly distributed (note the
relationship between stable democracies and
credit provision)
Exactly how many crisis-free, abundant
credit countries are there, and what do
they have in common?
• Singapore
• Malta
• Hong Kong, China
• Australia
• Canada
• New Zealand
Half of these are small island or city states.
The other half are democracies, two of which have
liberal (anti-populist) constitutions.
How many high crisis, low credit
countries are there--and what do
they have in common?
High crisis, very low credit: Chad, Democratic Republic of
the Congo
High crisis, low credit: Argentina, Bolivia, Brazil,
Cameroon, the Central African Republic, Colombia,
Costa Rica, Ecuador, Kenya, Mexico, Nigeria, the
Philippines, Turkey, and Uruguay
How many of these 16 countries have been stable
democracies since 1970? Only 2: Colombia, Costa
Rica.
What pattern is suggested?
Non-democracies are systematically less
likely to have stable banking systems
that allocate credit broadly.
But, we should not think that
democracy is a silver bullet
We therefore want to
understand two patterns
1. Why does there seem to be a
relationship between autocratic
government and weak banking
systems?
2. Why are some democracies more
prone to banking crises than others?
The key to the answer: In order for there to
be a banking system, three property rights
problems have to be mitigated
1.
2.
3.
Majority shareholders, minority shareholders, and
depositors must be protected from expropriation
by the government.
Depositors and minority shareholders must be
protected from expropriation by majority
shareholders.
Majority shareholders, depositors and minority
shareholders must be protected from
expropriation by debtors.
Solving these property rights
problems is difficult, because they
require the government (which has
inherent conflicts of interest)
1.
2.
3.
Governments simultaneously borrow from
banks and regulate them.
Governments enforce debt contracts but need
the political support of debtors
Governments distribute losses in the event of
bank failure, but they need the political support
of depositors
Autocracies can “solve” these property
rights problems, but at a cost
1.
2.
3.
4.
Compensate shareholders for expropriation risk
by creating barriers to entry that raise their
rates of return.
Low levels of competition among banks creates
weak incentives to search out new borrowers.
The threat of expropriation of depositors by
bankers creates weak incentives for depositors
to invest their wealth in banks.
The net effect is that most lending is insider
lending.
A classic case: the banking system
of Porfirian Mexico
The Mexican Banking Industry, 1897-1913
35
Number of Banks
30
25
Assets as % GDP
20
15
10
Deposits as % Assets
5
-
97
18
98
18
99
18
00
19
01
19
02
19
03
19
04
19
05
19
06
19
07
19
08
19
Source: Anurio de Estadística Fiscal, 1912-13.
09
19
10
19
11
19
12
19
13
19
The structure of this system
was highly uncompetitive
Structure of the Mexican Banking Industry
90%
80%
BLM
Banamex
70%
Market Shares
60%
50%
40%
30%
20%
10%
0%
1896 1899 1900 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911 1912
Bank shareholders earned rents
Ratio of Market to Book Values (weighted average), Mexican Banks
2.50
2.00
1.50
1.00
0.50
0.00
1901
1902
1903
1904
1905
1906
1907
Source: Maurer and Haber 2007.
1908
1909
1910
1911
And the banks mostly lent to
their own directors
Percent of non-government loans made to banks’
own boards of directors:
Banamex 1886 to 1901
100%
Mercantil de Veracruz 1898-1906
86%
Coahuila, 1908
72%
Durango, 1908
51%
Mercantil de Monterrey, 1908
31%
Nuevo León, 1908
29%
But the entire system was fragile
to the identity of the parties in
control of the government
Ratio of Bank Assets to GDP, Mexico, 1897-1929
35%
30%
25%
20%
15%
10%
5%
18
97
18
98
18
99
19
00
19
01
19
02
19
03
19
04
19
05
19
06
19
07
19
08
19
09
19
10
19
11
19
12
19
13
19
14
19
15
19
16
19
17
19
18
19
19
19
20
19
21
19
22
19
23
19
24
19
25
19
26
19
27
19
28
19
29
0%
Haber, Razo, and Maurer 2003.
Why democracy, by itself, is not a
solution: the problem of populism
Democracy helps solve the problem of
expropriation of the banks by the government
But what is to keep debtors from voting for
cheap credit and debt forgiveness?
A smart banker can see this coming, and hence
has an incentive to form a coalition with those
debtors--against everyone else.
A classic example: the U.S. banking
system from the 1820s to the 1980s
Technology and inflation killed
this bizarre system
But American political institutions
replaced one bizarre system with another
“We support the NationsBank acquisition of
BankAmerica because…they will make credit work
for low and moderate income people and they will
work with the community institutions.”
“--George Butts, President of ACORN Housing, from
his testimony to the Federal Reserve Board in
support of the acquisition of BankAmerica by
NationsBank, July 9 1998.
The curious coalition between
megabanks and activist groups
These deals could only work if special
purpose banks (Fannie and Freddie)
were required to buy these loans
The nature of American political institutions
required them to apply the same lending
standards to everyone and anyone
The outcome is well-known
Why are Canadian political institutions
so different from those of the U.S.?
Implications for Canada’s governmentbanker partnership
1.
Banking policy in Canada was centralized in the national
government; while banking policy in the US was historically
left to the states.
2.
Canada has an unelected upper house of parliament that is
not subject to term limits
3.
In Canada populist banking proposals were always beaten
back: Canada has had a system of a few large banks since
1817.
4.
But an elected lower house means that Canadian banks
cannot extract rents the way the cartelized Mexican
banking system did. Bank charters are renewed every five
years (ten years previously).
Takeaways
1. There is no getting politics out of bank
regulation. Politics is baked in, and that
explains why few countries achieve
abundant and stable bank credit.
2. Positive change is possible, but only
within the constraints imposed by a
society’s political institutions. (e.g., The
USA cannot chose to have the Canadian
banking system).
3. To learn more…See Calomiris and
Haber, Fragile by Design (forthcoming).