There are mainly two types of theories explaining banking crisis, emanating from the monetarist school respectively … institutional clash. Not every recession has caused a banking crisis. But all banking crises have been preceded by an institutional … clash. Consequently, an institutional clash is a prerequisite but not sufficient to cause a banking crisis: there must be a …

regulatory framework. In addition, we argue that banking-on-the-average rules ensure the build-up of bank equity capitals in … booms and thus avoid excessive leverage. Prudent banks can impose prudency on other banks. In a simple model of a banking … system, we show that a banking-on-the-average framework can deliver the socially optimal solution because it induces banks to …