Financial Development and Financial Fragility: Two Sides of the Same Coin?

The paper puts forward three interrelated reasons that account for the recent breakdown of the finance-growth nexus, comprising the use (or abuse) of the relationship by policymakers, capture by ruling elites and institutional constraints. Evidence consistent with these hypotheses is provided from a recent European banking crisis. It concludes that in order to restore the ability of finance to promote growth, the influence of ruling elites on the rule of law, financial regulation and supervision needs to be minimized.