The global and European financial crises since 2008 have made abundantly clear, once again, the extremely serious economic and political consequences of financial instability. In their study of the costs of systemic banking crises in industrialized and emerging markets since World War II, Reinhart and Rogoff (2009a) find that crises trigger “deep and prolonged” asset market collapses; on average, real estate markets collapse by 35 percent over six years, while stock prices fall by more than 50 percent, on average, over more than three years. The damage to the real economy from financial crises is even more severe: economic output in the wake of crises falls, on average, by 9 percent over two years, while unemployment rises by 7 percent over more than four years. Similarly, Romer and Romer (2017) find that GDP in OECD countries is typically 9 percent lower five years after an extreme financial crisis.

O Canada! This is the national anthem of Canada, of course. But lately these words have been uttered in the most unlikely of contexts. Residents of countries around the world who have experienced the anguish of banking crises have looked at Canada’s remarkably stable banking system with awe and envy. Beginning in 2008, a global financial crisis swept North America and Europe, and several long-standing financial institutions with prestigious names – Lehman Brothers, Bear Stearns, Northern Rock, Merrill Lynch, Wells Fargo, and Fortis, to name a few – collapsed or required emergency bailouts. The crisis hit the United States the hardest, but the United Kingdom, Switzerland, Germany, Belgium, and many other countries faced debilitating bankruptcies and bank runs through 2010. Canada was different. No Canadian bank failed or required emergency funding from the government. Some Canadian banks even posted healthy profits during the height of the crisis, seemingly in proud defiance of their southern neighbor’s faltering financial system. Unsurprisingly, policymakers and social scientists around the world have wondered whether Canada holds the secret to financial stability, and if so, whether it can be replicated elsewhere.

Thus far in the book, we have described the substantial variation in banking crises, capital inflows, and financial market structure across the industrialized world in the post–Bretton Woods era, and we have argued that the destabilizing impact of capital inflows is conditional on the relative prominence of banks versus non-bank financial markets. When banks compete with well-developed national securities markets to provide financing for businesses, their appetite for risk increases. As we discussed in Chapter 2, securities markets can incentivize even the most traditional commercial banks to take on more risks, even if those risks do not appear to be closely tied to securities markets. Capital inflows amplify this risk and increase the chance of a banking crisis. In contrast, when banks operate alongside relatively underdeveloped securities markets, they maintain their conservative bias and capital inflows are less likely to be destabilizing. Ultimately, it is the combination of foreign capital inflows and domestic financial market structure that tips the balance between banking stability and banking crises.

Banking stability has long been a hallmark of Germany’s economy. This image has been historically embodied by the solid stone façades of Germany’s largest banks (now replaced by the glass-and-steel Frankfurt skyline), as well as the stereotypical image of the conservative German banker, clad in his well-tailored dark suit and gazing sternly at the camera through wire-rimmed glasses. Ever since the rise to international prominence of German banking empires, such as the Fuggers, Welsers, and Rothschilds, in the sixteenth to eighteenth centuries, German bankers have had a reputation for prudence, competence, and stability. Until recently, this reputation was largely deserved: with the exception of the interwar era/Great Depression and the notable failure in 1974 of Herstatt Bank – a small private bank that highlighted problems of settlement risk in global finance – the German banking system has been remarkably resilient throughout modern history.

There is an old joke in the banking industry, told and retold at cocktail parties and conferences, about the “3-6-3 plan.” It goes something like this: bankers should pay depositors a 3 percent interest rate, issue loans at 6 percent, and head to the golf course by 3 o’clock. The joke now comes with a whiff of nostalgia for the old days of banking, in which financial intermediation was viewed as a relatively boring industry that provided simple financing for customers and predictable middle-class careers for bankers.

Trust is ubiquitous in the financial system. Banks trust that customers will repay their loans. Depositors trust that banks will manage their money carefully. And banks trust other banks to provide liquidity and to remain standing day after day. But as Walter Bagehot – arguably the most prominent scholar of banking in modern history – noted in his famed account of London’s 1866 financial panic, trust in the financial system can erode from “hidden causes.” When trust is weakened, even seemingly small accidents – like the collapse of London bank Overend, Gurney, and Company, which triggered the panic – can cause systemic financial crises.

Successful attainment of SDG17 is essential for implementing the other 16 SDGs, all of which depend upon secure means of implementation and durable partnerships. Funding for forests from ODA and other sources has trended upwards since 2000, providing reason for cautious optimism. However, REDD+ finance is declining. Private sector investment remains important. The idea of impact investment, which aims to solve pressing environmental and social problems while providing a return for investors, could make a significant contribution to the SDGs. However, not all sustainable development finance promotes forest conservation. Increasing funding for agricultural production often incentivises the conversion of forests to agricultural land while generating deforestation. The policy of zero net deforestation (ZND) is leading to the creation of partnerships to promote deforestation-free commodity supply chains for four forest risk commodities (palm oil, soy, beef and timber). Some innovative partnerships have been created to promote sustainable development involving intergovernmental organisations, the private sector, research institutes, NGOs and grass roots organisations. However, such partnerships exist within a neoliberal global economic order in which there are net financial flows from the Global South to the Global North that negate financial flows for sustainable development.