When Systems Create Crises : An Institutional Approach to the Causes of Banking Crises in the United States and Japan

Abstract

Since the American Subprime-crisis from 2007, financial crises have been in the forefront of the political economic agenda. The questions are how such crises are created and how the economic systems should be designed to avoid such crises in the future. In this master thesis, I study banking crises, a subtype of financial crises, and the historic role of political institutions constituting the financial and economic system in the build-up up of banking crises.

My analysis is built on a theoretical framework of institutions at different levels and with different scope, including international and national structures. Institutions on banking, finance and international monetary cooperation, broader international economic institutions and national financial relations and the role of the state are investigated. These structures are analyzed by a comparative case-study of the build-up to four different banking crises in Japan and the United States, two crises in the 1920s and two crises in he 1980s and 90s. Japan and the United States are built on two different institutional set-ups, which make it possible to compare the crisis-build-up in different institutional settings.

I find that no single institutional factor explains the occurrence of the four banking crises. All four crises are characterized by liberal banking and finance markets or by liberalization of these. Together with exposure to volatile and risky markets, this made the economic systems conducive to banking crises. In addition, central bank policy, the ties between finance and business and the role of the state contributed to the crises. Analyzing two time-periods gives a possibility to draw inferences on the degree of institutional learning in the economies. To some extent, the same mistakes are repeated in all crises. After the crises in the 1920s, the institutional set-up was changed in both countries to reduce competition in banking and finance. In the 1970s and early 80s these structures were weakened and the growing competition in these sectors are found to be a major contributor in the crises to come. The economic system influence the occurrence of financial crises.