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The interwar years saw the rise of New York to challenge London as the world’s leading provider of financial services. This paper will show that the current explanations fail to identify a key factor in New York’s rise. The City was prevented from operating a full capacity by a capital issues embargo, imposed by the Bank of England to support the pound. As a result, New York was able to enter the sector with little competition from London, and expand rapidly to issue over half of the global capital exported abroad in the 1920s. Without the embargo, this would not have been possible, as the London merchant banks were the most productive producers in the industry, a position built up over the previous half century. This result challenges the consensus that the return to gold was good for the City. The merchant banks suffered and lost business, suggesting that this policy was even more disastrous than is currently thought.

This paper unveils a new resource for macroeconomic research: a long-run dataset covering disaggregated bank credit for 17 advanced economies since 1870. The new data show that the share of mortgages on banks’ balance sheets doubled in the course of the twentieth century, driven by a sharp rise of mortgage lending to households. Household debt to asset ratios have risen substantially in many countries. Financial stability risks have been increasingly linked to real estate lending booms, which are typically followed by deeper recessions and slower recoveries. Housing finance has come to play a central role in the modern macroeconomy.

We examine the evolution of real per capita GDP around 100 systemic banking crises. Part of the costs of these crises owes to the protracted nature of recovery. On average, it takes about 8 years to reach the pre-crisis level of income; the median is about 6.5 years. Five to six years after the onset of crisis, only Germany and the United States (out of 12 systemic cases) have reached their 2007-2008 peaks in real income. Forty-five percent of the episodes recorded double dips. Post-war business cycles are not the relevant comparator for the recent crises in advanced economies.

Nowadays Corporate Governance is one of the most interesting and controversial matters of research and study. Undoubtedly, the economic developments of the last decade have made the need for detailed analysis about the processes of Governance and its impact on corporate choices even more fascinating and relevant. This should be done through an interdisciplinary approach, because in fact, the term Governance cannot and must not be exclusively linked to economic and company aspects only. Indeed, the present economic conditions demonstrate the large correlation between social, economic and political factors. Because of this interconnectedness, the importance of the Italian Credit Institutions is highlighted because of their active and decisive part in private and corporate choices. Over the centuries, Italian Savings Banks in particular have been a clear example of such interdependence amongst the public and the private. They were first simple Charity Institutions and then they evolved to play an increasingly important role amongst the Credit Institutions. Their quickness in spreading across the Italian territory and their need to take care of their own clients’ several necessities, induced the Banking Foundations to adopt a precise and rigorous Governance structure which we intend to analyse in this work. It is necessary, therefore, for a complete comprehension, to address the issues concerning the Credit and Savings Institutions’ regularity, current nature and goals. Here, it is also relevant to mention perhaps the most controversial issue about the Banking Foundations, that is, their dual public and private goals and, consequently, the different interests which follow.In conclusion, through this work, we want to give a framework in order to comprehend the Italian Institution of Savings Banks, and particularly, their metamorphosis into Foundations of Banking origin, their role and their particular importance for enterprises development.

Die Lehman-Insolvenz förderte die hohe Interdependenz und Ansteckungsgefahr im Bankensektor zu Tage. Die Vielzahl der gegenseitigen Kredit- und Anleihegeschäfte macht insbesondere die Insolvenz einer Großbank zum unkalkulierbaren Risiko. Um dieser Geiselhaft zu entkommen, wollen Aufsicht und Politik seit längerem das fremdfinanzierte Wachstum der Banken begrenzen. Dieses Bemühen steht beispielsweise auch hinter der neu eingeführten Leverage Ratio im Baseler Regelwerk (Basel III). Das DIW Berlin hat für Deutschland, Großbritannien und die USA untersucht, ob dies bisher gelungen ist. Dabei zeigt sich: In den Jahren vor der Finanzkrise haben die Bankbilanzen in allen drei Ländern sehr viel schneller zugelegt als das Bruttoinlandsprodukt. Im Wesentlichen wurde das exzessive Bilanzwachstum durch Fremdkapital finanziert. Die Maßnahmen im Zuge der Finanz- und Wirtschaftskrise haben das Wachstum der Bankbilanzen nur kurzfristig gebändigt. Auch die neuen Eigenkapitalvorschriften (Basel III) sind voraussichtlich nicht in der Lage, das Bilanzwachstum einzudämmen.

Eine angemessene Eigenkapitalausstattung der Großbanken ist die wichtigste Voraussetzung für die Bildung von Vertrauen in die Stabilität des Bankensektors. Die risikogewichtete Eigenkapitalquote (Equity Ratio) ist mit zahlreichen Problemen behaftet und daher als Indikator für die Widerstandskraft einer Bank nur sehr bedingt geeignet. Eine bessere, risikounabhängige Kennziffer stellt die Leverage Ratio dar. Sie schafft Vergleichbarkeit zwischen Realwirtschaft und Finanzwirtschaft beim Risikomaß Eigenkapitalquote und erhöht damit die Transparenz in Bezug auf die Risikoposition einer Bank. Für ihre Berechnung sind weder aufwendige interne Risikogewichtungsmodelle notwendig, noch benötigt man das Urteil von externen Rating-Agenturen. Die Leverage Ratio diskriminiert nicht zwischen unterschiedlichen Anlageformen, also auch nicht zwischen Unternehmenskrediten und Staatsanleihekäufen. Zudem bremst sie das Bilanzwachstum und leistet dadurch einen Beitrag zur Eingrenzung des "too big to fail"-Problems.

This paper examines government policies aimed at rescuing banks from the effects of the great financial crisis of 2007-2009. To delimit the scope of the analysis, we concentrate on the fiscal side of interventions and ignore, by design, the monetary policy reaction to the crisis. The policy response to the subprime crisis started in earnest after Lehman’s failure in mid September 2008, accelerated after February 2009, and has become very large by September 2009. Governments have relied on a portfolio of intervention tools, but the biggest commitments and outlays have been in the form of debt and asset guarantees, while purchases of bad assets have been very limited. We employ event study methodology to estimate the benefits of government interventions on banks and their shareholders. Announcements directed at the banking system as a whole (general) and at specific banks (specific) were priced by the markets as cumulative abnormal rates of return over the selected window periods. General announcements tend to be associated with positive cumulative abnormal returns and specific announcements with negative ones. General announcements exert cross-area spillovers but are perceived by the home-country banks as subsidies boosting the competitive advantage of foreign banks. Specific announcements exert spillovers on other banks. Our results are also sensitive to the information environment. Specific announcements tend to exert a positive impact on rates of return in the pre-crisis sub-period, when announcements are few and markets have relative confidence in the “normal” information flow. The opposite takes place in the turbulent crisis sub-period when announcements are the order of the day and markets mistrust the “normal” information flow. These results appear consistent with the observed reluctance of individual institutions to come forth with requests for public assistance. JEL Codes: G01, G21, N20, PSL Quarterly Review, V. 63, N. 254 (2010)

The article is an introduction to the new issue of the Journal. It provides an overview of the current economic and financial situation and summarises the main topics dealt with by the following articles. The financial crisis continues to unfold, taking new turns. By now, it is clear that bank bailouts have a heavy cost for the public purse. This adds to the usual increase in public deficits in periods of economic crisis. Financial markets price these difficulties in terms of wider spreads between bills and bonds of such countries compared to “safe” countries such as Germany. In turn, this increases the cost of public debt and risks igniting an unsustainable downward spiral. Recourse to heavy cuts in public expenditure is called forth by some powerful European governments and by the remnants of the Washington consensus; however, under the pressure of financial markets even those who are not convinced by the validity of this policy strategy have to give in. Thus, the costs of banking bailouts are shifted onto social expenditure, while the general retrenchment of the public sector aggravates the economic crisis. JEL Codes: G01, G21, N20, PSL Quarterly Review, V. 63, N. 255 (2010)

In the event of third generation crisis, international lending of last resort should be used if and only if the ILLOR is informed on the subject of financial and banking domestic markets. Therefore, if will act at a macroeconomic level, as a usual ILLOR, but also at a microeconomic level, since there will be selective lending to commercial banks. Our model shows that there are two conditions of optimality of this intervention: first, the country should be eligible; second, only solvent banks should be bailed out.

This study investigates the legitimacy of the relatively high interest rates charged by those microfinance institutions (MFIs) which have been transformed into regulated commercial banks using information garnered from a panel of 1232 MFIs from 107 developing countries. Results show that formally regulated micro banks have significantly higher average portfolio yields than their unregulated counterparts. By contrast, large-scale MFIs with more than eight years of experience have succeeded in lowering interest rates, but only up to a certain cut-off point. The implication is that policies which help nascent small-scale MFIs to overcome their cost disadvantages form a more effective pricing strategy than do initiatives to transform them into regulated institutions.

The alleged pro-cyclicality of bank capital (high in good times, low in bad) has received some blame for the recent financial crisis. Others blame the countercyclicality of capital regulations: too low in high times and too high in bad. To address this problem, Basel III has introduced countercyclical capital buffers for large banks. But just how cyclical is bank capital? We look at the question from several vantage points, using both detailed recent data on risk-weighted assets and several sources of annual data going back to 1834. To help understand the historical data, we provide a short summary of capital concepts and regulation from early America to the present.

This study, empirically, investigates the determinants of bank profitability. The debate on whether Basel capital regulation affects bank profitability continues to attract research interest, globally. I contribute to this debate by providing a country specific study. Overall, I find that Basel capital regime had no significant effect on bank profitability. The result is significant because it lends support to the view that modified Basel accord in different countries might be aimed to meet other prudential objectives relative to the intended objective - to reduce excessive bank risk-taking. Second, after employing NIM and ROA profitability metrics, I find that the determinants of bank profitability, and its significance, depends on the profitability metric employed. Third, I find that loan quality significantly influences bank interest margin while bank size and cost efficiency significantly influences return on asset. Finally, bank capital adequacy ratio is observed to be a significant determinant of bank profitability.

In the process of financial globalization and diversification, the issue of financial stability has become heated all over the world. This paper attempts to uncover the delicate relationship between banking structure and financial stability by comparing and analyzing the situation of the Chinese and German banking systems. This paper suggests that (i) the trade-off between competition and concentration in banking industry is a vital factor to maintain financial stability and (ii) concentration is not always a bad thing for financial stability, especially in banking systems with discontent bank performance.

How should banks be regulated? Must governments tightly regulate banks to prevent financial panics, or is little or no regulation best? Can private banks be trusted to issue paper money or must this activity be a government monopoly? Theory can help answer these questions, but increasingly in recent years economists have turned to the natural experiments of history to find out how well free banking systems, or more accurately lightly regulated banking systems, have worked in practice. We now have numerous studies of lightly regulated banking in Scotland, the United States, Canada, and many other countries. As usual, research has produced new questions and heated controversies. The resulting ruckus tends to obscure the areas in which research has produced a consensus. Here we try to separate the areas where there is a consensus from areas where research is still in its early stages.

Is there a link between loose monetary conditions, credit growth, house price booms, and financial instability? This paper analyzes the role of interest rates and credit in driving house price booms and busts with data spanning 140 years of modern economic history in the advanced economies. We exploit the implications of the macroeconomic policy trilemma to identify exogenous variation in monetary conditions: countries with fixed exchange regimes often see fluctuations in short-term interest rates unrelated to home economic conditions. We use novel instrumental variable local projection methods to demonstrate that loose monetary conditions lead to booms in real estate lending and house prices bubbles; these, in turn, materially heighten the risk of financial crises. Both effects have become stronger in the postwar era.

An intense process of deregulation and financial liberalization in Latin America has increased competitive pressures and led to bank restructuring and consolidation. This paper looks at firm access to credit in the region, focusing on the role of credit market structure. Using firm-level data from theWorld Bank Enterprise Survey, we find that access to bank credit is very heterogeneous. On average, smaller and less productive firms are less likely to apply for credit and more likely to be financially constrained. We also find that a high degree of bank penetration and competition are significantly correlated with a lower probability that borrowers are financially constrained. Foreign banks penetration has a negative effect on access to credit particularly in less developed and more concentrated markets, while it has a positive influence in more competitive and financially developed markets.

The relative popularity of adjustable-rate mortgages (ARMs) and fixed-rate mortgages (FRMs) varies considerably both across countries and over time. We ask how movements in current and expected future interest rates affect the share of ARMs in total mortgage issuance. Using a nine-country panel and instrumental variables methods, we present evidence that near-term (one-year) rational expectations of future movements in ARM rates do affect mortgage choice, particularly in more recent data since 2001. However longer-term (three-year) rational forecasts of ARM rates have a weaker effect, and the current spread between FRM and ARM rates also matters, suggesting that households are concerned with current interest costs as well as with lifetime cost minimization. These conclusions are robust to alternative (adaptive and survey-based) models of household expectations.

The aim of this document is to complement the analysis of ‘variegated financialisation’ provided (in an associated paper) by Passarella Veronese (2013) with a preliminary examination of the process of financial integration of EU countries, and especially of Euro Area’s member-States. In this regard, figures show that a process of increasing financial interconnectedness between different country-based economic units has been actually operating since the early 1990s within the Euro Area. As pointed out by ECB’s staff and other economics studies, convergences in lending rates and sovereign bond yields have been recorded, coupled with growing cross-border flows of capitals and cross-border interbank market integration (until the outbreak of the recent European crisis at least). However, especially after the launch of the single currency in 2002, this dynamics has gone along with growing current account imbalances (and, symmetrically, financial imbalances) within the Euro Area, due to differences in national growth rates, ‘inefficiencies’ in economies of peripheral countries, and the successful deflationary policies adopted by core countries. As a result, the permanent current account deficits of Euro Area’s peripheral economies have reflected in an increasing amount of financial liabilities placed by their government sectors in international markets (until the outbreak of the crisis at least). Thus, ‘real-world’ financial integration has not led to the development of a net of horizontal links between economic units operating within a uniform supranational economic space. What figures show, is rather a process of concentration and centralisation of capitals within the Euro Area, reinforcing structural imbalances between the core and the periphery. In the absence of radical changes in European institutions, this asymmetric integration is further endangering, instead of improving, the financial soundness of EU.

We analyse three databases of banking crises and investigate their consistency in the identification and timing of crises. We find that there are large and statistically significant discrepancies between the three datasets. We also compare the dating of banking crises according to these databases using information on the number and size of bank failures for four crises for which the timing strongly differs across these databases. We conclude that information on these variables allows determining the timing of banking crises more precisely. On the basis of our findings, we consider the database compiled by Laeven and Valencia to be the most accurate.

E tanulmány témája a készpénz nélküli fizetési forgalom centrumainak, a regionálisnál nagyobb jelentőségű pénzpiacoknak az integrációja. Ennek bemutatásához a különböző pénzpiacok közötti egyelőre még nagyon általános értelemben vett váltóárfolyam-jegyzések szolgálnak, azok a váltóárfolyamok, amelyeket egy meghatározott időpontban, egy meghatározott földrajzi térben, esetünkben Kelet-Közép-, Kelet- és Délkelet-Európában létező, a regionálisnál nagyobb jelentőségű, nemzetközi fizetési tranzakciókba bekapcsolódott pénz- vagy váltópiacok között ténylegesen jegyeztek., The subject of this study is integration of the centres of non-cash payment traffic and supraregional money markets. Used to present this are the discount-rate quotations on the various money markets (still in a very general sense)-the discount rates actually applied between money and bill markets of more than regional importance, involved in international payment transactions, at a specific time and in a specific geographical area, in this case East-Central, East and South-East Europe.

La crisis llevó a la aparición de nuevos hechos estilizados, y al uso de técnicas y herramientas provenientes de otras disciplinas, pero no provocó una crisis del programa dominante en macroeconomía financiera. Este artículo intenta explicar por qué se siguió ese rumbo y explora dos hipótesis: la asimetría entre los caminos que unen el núcleo firme de un programa de investigación con los cambios en el cinturón protector; lo que va del núcleo firme a la periferia nunca deja de fluir en la forma de módulos básicos para hacer nuevos modelos, y lo que se encuentra en la periferia nunca afecta al núcleo firme. La segunda es un hecho observable: tanto el programa rival más fuerte –la econofísica–, como los programas heterodoxos están por fuera de la economía dominante

We analyze the effects on bank valuation of government policies aimed at shoring up banks' financial conditions during the 2008-2009 financial crisis. Governments injected into troubled institutions massive amounts of fresh capital and/or guaranteed bank assets and liabilities. We employ event study methodology to estimate the impact of government-intervention announcements on bank valuation. Using traditional approaches, announcements directed at the banking system as a whole were associated with positive cumulative abnormal returns, whereas announcements directed at specific banks with negative ones. Findings are consistent with the hypothesis that individual institutions were reluctant to seek public assistance. However, when we correct standard errors for bank-and-time effects, virtually all announcement impacts vanish in Europe, whereas they weaken in the United States. The policy implication is that the large public commitments were either not credible or deemed inadequate relative to the underlying financial difficulties of banks.

A number of countries have gone through banking crises since the early 1970s. This work links those episodes with the patterns of various financial reforms within those countries. As banking crises are endogenous, crisis exposures to major trading partners help identify the causality between crises and reforms. Consistent with the previous literature, the results of this work demonstrate that systemic banking crises reverse most financial reforms. However, they do so with various lags, whereas the impact of non-systemic crises is largely insignificant. The main results remain unaffected after numerous robustness checks. A rich set of policy implications is discussed which could help establish a growth-enhancing financial regulatory framework after banking crises.

This paper examines what institutional and bank-specific factors determine bank stock price synchronicity. Using data on 37 countries from 1996–2007, we find that bank stocks are more aligned with the whole market (1) during the financial crisis; (2) in countries that have more credit provided by banks; (3) in countries that do not have explicit depository insurance; and (4) in countries that have lower bank-level disclosure. The results hold for both emerging and developed economy subsamples. Furthermore, in emerging economies, bank stocks in countries with higher degree of state-owned bank are more synchronized with the whole market, similarly, in developed markets, lower banking freedom enhances bank stock price synchronicity. Finally, the effects of state ownership, protection of property rights, and bank size are all more pronounced when determining bank stock price synchronicity during the financial crisis period.

The ongoing financial crisis is shaking central bankers' certainties about their mission, and a rethinking of such mission can greatly benefit from a non-finalistic reassessment of how central banking has evolved over the centuries. This paper does so by taking a functional, instead of an institutional approach. The survey covers the provision of both microeconomic (financial stability) and macroeconomic (monetary stability) central banking functions in the West since the Middle Ages. The existence of a number of important trends (some unidirectional, some cyclical) is underlined. The findings have implications for the current debate on the institutional design of central banking, both in the U.S. and in the eurozone. Historical evidence suggests that neither changes in the organizational model of central banks nor government deficit monetization should necessarily be seen as evil; what is crucial to the success of any solution, is that the institutional agreement backing the existence of money-issuing organizations must be credible. The appendix provides a case study on Norway.

This paper examines government policies aimed at rescuing banks from the effects of the financial cris is of 2008-2009. Governments responded to the crisis by guaranteeing bank assets and liabilities and by inje cting fresh capital into troubled institutions. We employ event study methodology to estimate the benefits o f government interventions on banks. Announcements directed at the banking system as a whole were associ ated with positive cumulative abnormal returns whereas announcements directed at specific banks with negati ve ones. The effects of foreign general announcements spilled over across different areas and were percei ved by home-country banks as subsidies boosting the competitive advantage of foreign banks. Specific announce ments produced effects that were consistent with other ba nks being crowded out for government resources. Multiple specific announcements exacerbated the extent of ba nks’ moral hazard. Results were sensitive to the in formation environment. Findings are consistent with the hypot hesis that individual institutions were reluctant t o seek public assistance.

We present a model with adverse selection where information sharing between lenders arises endogenously. Lenders' incentives to share information about borrowers are positively related to the mobility and heterogeneity of borrowers, to the size of the credit market, and to advances in information technology; such incentives are instead reduced by the fear of competition from potential entrants. In addition, information sharing increases the volume of lending when adverse selection is so severe that safe borrowers drop out of the market. These predictions are supported by international and historical evidence in the context of the consumer credit market. A LARGE BODY OF literature on credit markets has shown that asymmetric information may prevent the efficient allocation of lending, leading to credit rationing (e.g., Jaffee and Russell (1976), Stiglitz and Weiss (1981)) or to a wedge between lending and borrowing rates (e.g., King 1986)). In this literature informational asymmetries are taken to be exogenous: lenders fail to observe some relevant characteristic or action of potential borrowers and have no way of learning about it. In some countries, however, lenders can improve their knowledge about new customers by exchanging information with other lenders through information brokers, generally known as "credit bureaus." The latter collect, file, and distribute the information voluntarily supplied by their members, and operate on the principle of reciprocity: lenders who do not provide data are denied access to the bureau's files. In other countries, instead, these institutions do not exist. The literature offers no guide to identify the factors that lead to endogenous communication between lenders. This paper is an attempt to fill the gap. Information sharing is important for a number of reasons: it may increase the degree of competitiveness within credit markets (Vives (1990)), improve

The article is an introduction to the new issue of the Journal. It provides an overview of the current economic and financial situation and summarises the main topics dealt with by the following articles. Retrenchment of public expenditure is once again being called for by international agencies as well as by leading economists and politicians. The irony of this all is that by rescuing financial institutions the policy authorities, which up to now have totally ignored the problems posed by an excessive increase of private debt, focusing attention on public debt alone, have dealt with a crisis originating in the private debt area by shifting part of its weight to the public sector. This should call for some reconsideration of macroeconomic views. In any case, for any individual country considered in isolation, it is rather difficult to ignore the mainstream recommendations. Countries with already large public deficits and debt risk coming under attack on the side of financial speculation if they ignore the consensus recipes. Financial markets can then foresee a spiral of growing public expenditure for interest payments, growing deficits and growing public debt, further increasing the spread up to the point of collapse. Fiscal retrenchment then takes place, so to say, at gunpoint. There is little choice, thus, for many countries on the sign of their fiscal policies. However, this constraint leaves various options open. JEL Codes: G01, G21, N20, PSL Quarterly Review, V. 63, N. 254 (2010)

Beginning with the fact that performant strategies of the financial institutions have programmes and management procedures for the banking risks, which have as main objective to minimize the probability of risk generation and the bank’s potential exposure, this paper wants to present the operational risk measurement. Therefore, the first part presents the conceptual approach of the operational risks through the point of view of the financial institutions exposed to this type of risk. The second part describes different measurement methods for the operational risk. The final part of this article presents the approach assumed by a financial institution with a precise purpose: the quantification of the minimum capital requirements of the operational risk., peer-reviewed

This paper discusses the role of state intervention for prevention, containment, and resolution of financial crises based mainly on the Korean experience during the 1997 Asian financial crisis. Crises in emerging market and developing economies tend to be more complicated than those faced by advanced economies because they are twin crises : financial and currency crises. Such crises require the development of a comprehensive strategy covering the stabilization of the domestic financial market and the foreign exchange market, closely coordinated responses by different government bodies, an extraordinary effort for financial restructuring, and the introduction of a new regulatory framework. This effort should be based on an effective crisis management team of experts given a clear mandate with well defined power; strong political support; effective communication with the market players, both domestic and foreign; and sufficient mobilization of public funds. In this regard, this paper emphasizes the importance of building a reliable information base, prompt actions, orchestrating political consensus, and a balanced approach to restructuring and regulation among different types of financial institutions. The paper also highlights the need for a new international financial architecture matching the rapid integration into the global market of the financial markets of emerging and developing economies while their currency remains non-convertible.

This paper examines government policies aimed at rescuing banks from the effects of the great financial crisis of 2007-2009. To delimit the scope of the analysis, we concentrate on the fiscal side of interventions and ignore, by design, the monetary policy reaction to the crisis. The policy response to the subprime crisis started in earnest after Lehman’s failure in mid September 2008, accelerated after February 2009, and has become very large by September 2009. Governments have relied on a portfolio of intervention tools, but the biggest commitments and outlays have been in the form of debt and asset guarantees, while purchases of bad assets have been very limited. We employ event study methodology to estimate the benefits of government interventions on banks and their shareholders. Announcements directed at the banking system as a whole (general) and at specific banks (specific) were priced by the markets as cumulative abnormal rates of return over the selected window periods. General announcements tend to be associated with positive cumulative abnormal returns and specific announcements with negative ones. General announcements exert cross-area spillovers but are perceived by the home-country banks as subsidies boosting the competitive advantage of foreign banks. Specific announcements exert spillovers on other banks. Our results are also sensitive to the information environment. Specific announcements tend to exert a positive impact on rates of return in the pre-crisis sub-period, when announcements are few and markets have relative confidence in the "normal" information flow. The opposite takes place in the turbulent crisis sub-period when announcements are the order of the day and markets mistrust the "normal" information flow. These results appear consistent with the observed reluctance of individual institutions to come forth with requests for public assistance.

This paper examines the depth and duration of the slump that invariably follows severe financial crises, which tend to be protracted affairs. We find that asset market collapses are deep and prolonged. On a peak-to-trough basis, real housing price declines average 35 percent stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years. Not surprisingly, banking crises are associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls an average of over 9 percent, although the duration of the downturn is considerably shorter than for unemployment. The real value of government debt tends to explode, rising an average of 86 percent in the major post-World War II episodes. The main cause of debt explosions is usually not the widely cited costs of bailing out and recapitalizing the banking system. The collapse in tax revenues in the wake of deep and prolonged economic contractions is a critical factor in explaining the large budget deficits and increases in debt that follow the crisis. Our estimates of the rise in government debt are likely to be conservative, as these do not include increases in government guarantees, which also expand briskly during these episodes.

Financial products are unstandardized and subject to a great deal of uncertainty. They tend to concentrate geographically because of the reduction in information costs resulting from close contacts. Concentration leads to economies of scale and encourages external economies. Great financial centers enjoy a high degree of persistence but are not immune from decline and eventual demise. Yet, their achievements are passed along in a an evolutionary manner. In revisiting the historical record of seven international financial centers – Florence, Venice, Genoa, Antwerp, Amsterdam, London and New York — the paper finds evidence of a long evolutionary chain of banking and finance. As to the present and the future, the forces of integration are likely to give an additional boost to the persistence of international financial centers.

In this paper we present a series of models, all within the context of a simple two-good economy, which bring out the distinctions between the different types of money and financial institutions. The models emphasize the physical properties of the economic goods, moneys, and trading systems. In Part 1 of the paper, we covered models in which the money is a consumable storable; here in Part 2 we consider economies using durable money, fiat money, or credit. Under this framework we are able to successfully contrast the role of private money lenders, banks, bilateral credit systems, and credit clearinghouses. We are also able to model the importance of the bankruptcy or default penalty in supporting the use of fiat.

In this paper we present a series of models, all within the context of a simple two-good economy, which bring out the distinctions among the different types of money and financial institutions. The models emphasize the physical properties of the economic goods, moneys, and trading systems. Part 1 covers models in which the money is a consumable storable; the economies in Part 2 use durable money, fiat money, or credit. Under this framework we are able to successfully contrast the role of private money lenders, banks, bilateral credit systems, and credit clearinghouses. We are also able to model the importance of the bankruptcy or default penalty in supporting the use of fiat.