Politics and the Determinants of Banking Crises: the Effects of Political Checks and Balances

A large body of research has provided significant insights into the financial and macroeconomic causes of banking crises. Many of these causes - ranging from lapses in financial regulation to determined efforts to maintain a fixed exchange rate - have in common their origins as policy decisions of political actors. Numerous non-technical criteria, ranging from the identity and interests of political constituencies to political and electoral institutions, condition the incentives of political decision makers to make or correct policy "mistakes". This paper explores the role of one significant political institution, the presence or absence of political checks and balances. Checks and balances influence the independence of regulators, the value and cost of special interest payoffs to policy makers, and individual political incentives to avoid collective policy failures. The evidence suggests that the financial and economic causes of crisis, consistent with these arguments, differ significantly in countries that exhibit few or many political checks and balances.