Fragile by Design

Calomiris and Haber argue that whether a country's banking system is stable or crisis-prone is determined by politics rather than by economics or regulation. They call the mechanism the game of bank bargains: banking systems are the outcome of a coalition between the government, which needs credit and controls the rules, bankers, who need charters and protection, and whichever other groups have political power, typically debtors and depositors.

The method is comparative and historical. The United States has suffered repeated banking crises across two centuries. Canada, with a similar economy, similar geography and similar exposure to the same shocks, has had none since 1840. The authors attribute the difference to political structure. American populist coalitions of agrarian debtors blocked branch banking, producing thousands of small undiversified unit banks that failed whenever local conditions turned. Canada's federal structure gave chartered banks nationwide branching and a stable oligopoly, which produced diversification and durability at the cost of less competition. They extend the analysis to Mexico, where a narrow coalition produced a banking system that served the government and a small elite while providing almost no credit to the economy, and to Brazil and the United Kingdom.

The modern American chapters argue that the coalition changed in the late twentieth century: branching restrictions fell, and the new bargain traded regulatory approval for commitments on mortgage lending to designated groups, which the authors treat as the political origin of the subprime expansion.

The framework is powerful and the Canada comparison is difficult to answer. The treatment of the 2008 crisis is the contested part: most researchers find that community reinvestment obligations account for a small share of subprime origination, and that private-label securitisation drove the expansion. Readers can take the historical and comparative analysis, which is strong, without accepting that chapter.