The Enigma of Banking and its Recurring Crises

Abstract

During the 1990s, many economists have argued that Japan possesses too many banks. The financial press has referred to both Japan and Germany as seriously ‘over-banked’ economies, with the helpful advice that banks should be merged, sold to foreign investors or closed down. However, in order to come to this conclusion, it is necessary to understand the actual role of banks in economies. While the layperson may assume that economists have long solved this issue, in fact the very existence of banks has remained an enigma according to the mainstream theories.