The Center for Global Development and Paul H. Nitze School of Advanced International Studies presented the Massachusetts Avenue Development Seminar (MADS)* “Fewer Banks, Fewer Crises” with Adam Posen, Senior Fellow, Institute for International Economics. Jerry Caprio, Director, Operations and Policy Department, Financial Sector Operations Vice Presidency, The World Bank served as the discussant.
ABSTRACT: I suggest a strategy to prevent future financial crises which has been underutilized to date: reducing the number of banks. If traditional deposit-taking, long-lending banks were to play a reduced role in the supply of financial services for most economies, and therefore the amount of damage bank failures could do was limited, both the incidence and severity of financial crises would be decreased. This would involve reducing the share of corporate financing and savings allocation being met by banks, and increasing the relative shares of those met by alternative financial technologies such as securities markets and mutual funds. For developing economies, which rely excessively on the banking sector, and for whom monitoring of the imperfect information in the sector is expensive and difficult, moving in this direction makes particular sense.
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