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Institutional Clash and Financial Fragility. An Evolutionary Model of Banking Crises

Author

Listed:
  • Knutsen, Sverre
  • Sjögren, Hans

Abstract

There are mainly two types of theories explaining banking crisis, emanating from the monetarist school respectively institutional economics. Using an allegory, monetarists are discussing how much water in terms of liquidity that is needed to stop a fire escalating into a disaster, while institutionalists are occupied with the causes of the fire. Our study rejects the explanatory value of the monetarist view, but also criticizes the Kindleberger-Minsky model for not taking the legalisation and the sanctions in the hands of the authorities into account. We consider the institutional factor as a decisive part in the understanding of systemic risk and the process towards increasing debt in non-financial sectors and introduce the concept institutional clash. Not every recession has caused a banking crisis. But all banking crises have been preceded by an institutional clash. Consequently, an institutional clash is a prerequisite but not sufficient to cause a banking crisis: there must be a recession for a crisis to emerge. We also launch a stage-model for the evolution of banking crises. The stages in that model highlight decisive factors before, under and after a crisis. Our model has the capability to explain the occurrence of crises in a re-regulated economy. However, we only give few examples from Nordic banking crises how our model could be applied. Thus, the article is explorative. It is natural to make further empirical observation in order get a solid theory of driving forces behind banking crisis. The next step would be to empirically integrate all the Nordic banking crises between 1850 and 2000 in our analysis.

Suggested Citation

  • Knutsen, Sverre & Sjögren, Hans, 2009. "Institutional Clash and Financial Fragility. An Evolutionary Model of Banking Crises," MPRA Paper 13133, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:13133
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    References listed on IDEAS

    as
    1. Davis, E. Philip, 1995. "Debt, Financial Fragility, and Systemic Risk," OUP Catalogue, Oxford University Press, number 9780198233312.
    2. Caprio Jr., Gerard, 1998. "Banking on crises : expensive lessons from recent financial crises," Policy Research Working Paper Series 1979, The World Bank.
    3. Dow, James, 2000. "What Is Systemic Risk? Moral Hazard, Initial Shocks, and Propagation," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 18(2), pages 1-24, December.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Banking history; banking crisis; finance; institutional theory; Denmark; Finland; Norway; Sweden; Scandinavia;
    All these keywords.

    JEL classification:

    • N24 - Economic History - - Financial Markets and Institutions - - - Europe: 1913-
    • N84 - Economic History - - Micro-Business History - - - Europe: 1913-
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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