Journal of Banking & Finance twenty-three (1999) 655±662
Expansion of economic banking capabilities F N F or perhaps, universal banking is the cart, not the horse Steve H. Boyd
Carlson School of Management, School of Minnesota, 271-19th Opportunity, Minneapolis, MN 55455, USA
Abstract This kind of short essay deals with general banking in an environment where a government safety net (for example deposit insurance) results in a moral risk problem to get banks. This argues that universal bank signi®cantly exacerbates the problem. Speci®cally, universal bank extends the distortion of incentives brought on by moral hazard to other sectors from the economy. Ó 1999 Elsevier Science B. V. Most rights reserved. JEL classi®cation: G21 Keywords: Universal bank; Commercial bank; Bank control
1 . Introduction The title of my composition is a paraphrase of the name of an previous paper by my colleague, and special friend, Plug Kareken. His much cited paper (Kareken, 1983) is pretty famous because it essentially predicted the savings and mortgage crisis. However, it was not too widely go through in the early on eighties. Although I are not predicting any approaching crisis, My spouse and i am making the same rational point while Corresponding writer. Corresponding talk about: Kappell couch in Business and Government, Finance Department, Carlson School, Space 3-110, 321 19th Opportunity South, Minneapolis, MN 55455, USA; email: [email protected] umn. edu. 0378-4266/99/$ ± observe front subject Ó 99 Elsevier Technology B. Sixth is v. All privileges reserved. PII: S 0 3 7 8 - 4 two 6 6 ( being unfaithful 8 ) 0 0 1 0 1 - 0 *
M. H. Boyd / Diary of Financial & Finance 23 (1999) 655±662
Kareken regarding the significance of sequence. With this essay, widespread banking is definitely the ``cart'', and reform of the bank back-up (deposit insurance, the Price cut Window, and so forth ) is a ``horse''. My personal punch line is: if a universal banking method is implemented in the US without, ®rst, eliminating meaningful hazard as a result of safety net, the consequences could be most undesirable. Since, in my perspective, the safety net issue is a deepest and thorniest a significant the prudential regulation of banking institutions, I are not hopeful about a speedy ®x. you Let me assume for a moment. An argument I actually expect to notice is that we certainly have already ``solved'' the moral hazard problem in banking as a result of recent regulating innovations such as the BIS capital standards and other provisions of FDICIA, and so forth Critics of the essay will likely surely remember that the US bank industry is usually remarkably healthy and balanced and very well capitalized presently, as is the FDIC. Reacting to this kind of anticipated fights, I would ®rst observe that america is not the only region in the world. A great many other nations ± including a number of which likewise use the BIS capital criteria ± have experienced severe financial problems in the last ®ve years or so. The list of nations with banking entree runs via much of South usa and Mexico to some of Europe and the most of Asia. It includes nations around the world with remote banking challenges such as Britain and Portugal, and others such as Japan with crises concerning, essentially, the whole system. Can we really think our banking method is so exclusive that it is defense to this sort of forces? In that the new US financial experience is concerned, we have bene®ted from a great macroeconomic environment in recent years. To make certain, US banks have done well recently ± but , they have done well during one of many longest and strongest financial recoveries in post-war history. Recall that in just the final macroeconomic economic downturn (roughly 1989±1991) US banking companies did so totally that the Congress felt this necessary to allow bailout money for the FDIC. Though a bailout proved needless, I send it is too soon and too risky to declare success. The new regulatory regime is actually not put to test in anything at all except a benign environment. Next, We turn to a quick description of universal banking. 2 . Widespread banking A universal banking system is one out of which financial institutions are authorized to make value investments in ®rms rather...
Referrals: American Banker, 1997. Critique of Financial Reform Overblow, Darkness Panel Says, May 6th. Benveniste, L., Boyd, T. H., Greenbaum, S., 1991. Bank capital regulation. Osaka Economic Papers. Boyd, T. H., Chang, C., Jones, B., Ethical hazard beneath commercial and universal bank. Journal pounds, Credit and Banking, future. Gorton, G., Schmid, F. A., mil novecentos e noventa e seis. Universal Financial and the Functionality of German born Firms. Working Paper, School of Philadelphia, Philadelphia, PENNSYLVANIA. Kareken, J., 1983. Put in insurance reform or deregulation is the wagon, not the horse. Minneapolis Federal Hold Bank Quarterly Review 7, 1±9. Kareken, J., Wallace, N., 78. Deposit insurance and traditional bank regulation: A partial equilibrium annotation. Journal of Business 51, 413±438. Keeley, M., 1990. Deposit insurance, risk and market electrical power in financial. American Economic Review eighty (5), 1183±1200. Merton, 3rd there�s r. C., 1977. An conditional derivation off the cost of put in insurance and loan assures: An application of recent option charges theory. Record of Business and Fund 1, 3±11. Saunders, A., Walter, We., 1994. General Banking in the US. Oxford School Press, Ny. US Treasury, 1991. Modernizing The Economic climate: Recommendations for Less dangerous, More Competitive Banks. Division of the Treasury, Washington, DC.