Why do banking crises occur?
Why did the U.S. banking crisis of 2007-2008 occur? Many accounts have chronicled the bad decisions and poor risk management at places like Lehmann Brothers, the now-vanished investment bank. Still, plenty of banks have vanished, and many countries have had their own banking crises in recent decades. So, to pose the question more generally, why do modern banking crises occur? David Singer believes he knows. An MIT professor and head of the Institute’s Department of Political Science, Singer has spent years examining global data on the subject with his colleague Mark Copelovitch, a political scientist at the University of Wisconsin at Madison. Together, Singer and Copelovitch have identified two things, in tandem, that generate banking crises: One, a large amount of foreign investment surges into a country, and two, that country’s economy has a well-developed market in securities — especially stocks. “Empirically, we find that systemic bank failures are more likely when substantial...