Banks on the Brink: Global Capital, Securities Markets, and the Political Roots of Financial Crises

257 Pages·2020·6.535 MB·English

by  Mark Copelovitch, David A. Singer

Banks on the Brink
This innovative analysis answers a complex question of tremendous
economic and political importance: Why are some countries vulnerable
to banking crises, while others are resilient? In Banks on the Brink,
Copelovitch and Singer focus on the political decisions that shape the
structure of financial markets and the international economic forces
that make some countries especially vulnerable to financial instabil-
ity. They highlight the effects of two variables in combination: foreign
capital inflows and the relative prominence of securities markets versus
commercial banking in the domestic financial system. Foreign capital
is the fuel for banks’ potentially dangerous behavior, whereas banks
are more likely to take on excessive risks when operating in a financial
system with large securities markets. The book analyzes data from the
1970s through the early twenty-first century for most of the world’s
developed economies and provides historical case studies of two key
countries – Canada and Germany – which explore how political deci-
sions in the nineteenth and early-twentieth centuries continue to affect
their financial stability today. The analyses in this book have crucial
policy implications for identifying potential regulations and policies
that can work to protect banking systems against future crises.
Mark Copelovitch is a Professor of Political Science and Public Affairs
at the University of Wisconsin–Madison. He is the author of The
International Monetary Fund in the Global Economy: Banks, Bonds,
and Bailouts.
David A. Singer is a Professor of Political Science at the Massachusetts
Institute of Technology. He is the author of Regulating Capital:
Setting Standards for the International Financial System.
Political Economy of Institutions and Decisions
Series Editors
Jeffry Frieden, Harvard University
John Patty, Emory University
Elizabeth Maggie Penn, Emory University
Founding Editors
James E. Alt, Harvard University
Douglass C. North, Washington University of St. Louis
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Jeffrey S. Banks and Eric A. Hanushek, eds., Modern Political
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(Continued after the Index)
Banks on the Brink
Global Capital, Securities Markets, and
the Political Roots of Financial Crises
MARK COPELOVITCH
University of Wisconsin–Madison
DAVID A. SINGER
Massachusetts Institute of Technology
University Printing House, Cambridge cb2 8bs, United Kingdom
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477 Williamstown Road, Port Melbourne, vic 3207, Australia
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Cambridge University Press is part of the University of Cambridge.
It furthers the University’s mission by disseminating knowledge in the pursuit of
education, learning, and research at the highest international levels of excellence.
www.cambridge.org
Information on this title: www.cambridge.org/9781108489881
Doi: 10.1017/9781108779630
© Mark Copelovitch and David A. Singer 2020
This publication is in copyright. Subject to statutory exception
and to the provisions of relevant collective licensing agreements,
no reproduction of any part may take place without the written
permission of Cambridge University Press.
First published 2020
Printed in the United Kingdom by TJ International Ltd., Padstow, Cornwall
A catalogue record for this publication is available from the British Library.
Library of Congress Cataloging-in-Publication Data
Names: Copelovitch, Mark S., 1975- author. | Singer, David Andrew, author.
| Cambridge University Press.
Title: Banks on the brink : global capital, securities markets, and the
political roots of financial crises / Mark Copelovitch, University of
Wisconsin, Madison, David Singer, Massachusetts Institute of Technology.
Other titles: Political economy of institutions and decisions.
Description: New York : Cambridge University Press, 2019. | Series:
Political economy of institutions and decisions | Includes
bibliographical references and index.
Identifiers: LCCN 2019044103 | isbn 9781108489881 (Hardback) | isbn
9781108747714 (eBook)
Subjects: LCSH: Bank failures--Case studies. | Banks and banking--Case
studies. | Financial services--Case studies.
Classification: LCC hg1521 .C66 2019 | DDC 332.1--dc23
LC record available at https://lccn.loc.gov/2019044103
Isbn 978-1-108-48988-1 Hardback
Cambridge University Press has no responsibility for the persistence or
accuracy of URLs for external or third-party internet websites referred to
in this publication and does not guarantee that any content on such websites is,
or will remain, accurate or appropriate.
For Beth, Micah, and Dafna;
and for Steve

Contents
List of Figures page x
List of Tables xiii
Preface xv
Acknowledgments xvii
1 The Politics and Economics of Financial Instability 1
Understanding Banking Crises: National Market Structure
and International Capital 8
The Structure of National Financial Markets 9
The International Dimension: Global Capital 15
Summarizing the Argument 17
The Plan of the Book 18
2 Banking Crises, Capital Flows, and Financial Market
Structure 22
Banking Crises in the Industrialized World 24
What Causes Banking Crises? Capital Inflows
and Financial Market Structure 28
Capital Inflows: Net Flows 29
Capital Inflows: Gross Flows 31
Capital Inflows and Banking Crises 33
Financial Market Structure 34
Financial Market Structure and Banking Crises 41
Conclusion 42
3 Capital Inflows, Market Structure, and Banking Crises:
Empirical Evidence 43
Determinants of Banking Crises in OECD Countries 44
Dependent and Independent Variables 45
vii
viii Contents
Control Variables 47
Determinants of Banking Crises: Results 48
Determinants of Banking Crises: Robustness 57
Determinants of Banking Crises: Testing Alternative
Explanations 59
Size of the Banking System 59
Bank Concentration 59
Partisanship and Legislative Majorities 63
Capital Inflows, Market Structure, and Banking Crises:
How and Why? 64
Bank-Level Analysis: Capital Adequacy and Insolvency Risk 66
Results: Tier 1 Bank Capital and Commercial Bank Z-Scores 68
Conclusion 73
Data Appendix 78
Data and Country Samples 80
4 O Canada? Unraveling the Mystery of Canadian
Bank Stability 88
The Political Roots of the Canadian Banking Market 93
The Birth of a Modern Banking System 97
Political Origins of Canada’s Securities Markets 101
Canadian Capital Markets from 1900 to the Great Depression 106
The Great Depression: A Window of Opportunity Closes for
National Securities Regulation 109
Canada’s Underdeveloped Securities Markets Endure 113
Re-evaluating Canadian Bank Stability 119
Conclusion 121
5 Finanzplatz Deutschland: German Bank Stability
and Its Decline 124
The Origins and Development of the German Financial
System 127
German Banking in the Nineteenth Century: The
Emergence of the Three-Pillar System 128
German Securities Markets in the Nineteenth Century 133
Political Unification and the Shift of German Finance to Berlin 133
Arrested Development: The Politics of German Securities
Markets, 1870–1945 135
The Panic of 1873 and the Political Backlash against Securities
Markets 136
The 1896 Stock Exchange Law 144
The Interwar Era: The 1931 Financial Crisis and Nazi
Repression of Securities Markets 150
Postwar German Finance: Bank Dominance, Subordinate
Securities Markets, Persistent Stability 156