Great Expectations, Veto Players, and the Changing Politics of Banking Crises

Publication Date
Systemic Risk Centre Discussion Papers DP 28
Publication Authors

How have the politics of banking crises changed over the long run? Unlike existing static accounts, we offer a dynamic theory emphasizing how the emergence of voters’ “great expectations” after the 1930s concerning crisis prevention and mitigation reshaped the politics of banking crises in many democratic countries. We argue that both variations over time, centred on the emergence of these expectations, and variations within democratic countries, based on how veto players constrain policy change, exerted an important influence on the propensity of voters to punish incumbent political parties in the aftermath of banking crises. We find strong support for our argument using a new dataset of 100 democratic countries from 1831 – 2011. Political punishment in the aftermath of a banking crisis is mainly a modern phenomenon and is most evident in systems with polarized veto players.