Department of Economics
Saint Louis University
Professor: Rapach
Fall 2008
ECON 420
Money and Banking

Chapter Outline for “Chapter 11—Economic Analysis of Banking Regulation,” Frederic S. Mishkin, The Economics of Money, Banking, and Financial Markets, Eighth Edition (New York, N.Y.: Addison-Wesley, 2006)

ASYMMETRIC INFORMATION AND BANKING REGULATION

Government Safety Net: Deposit Insurance and the FDIC

bank failure: bank is unable to meet its obligations to pay its depositors and other creditors and so must go out of business

Moral Hazard and the Government Safety Net

Adverse Selection and the Government Safety Net

“Too Big to Fail”

Financial Consolidation and the Government Safety Net

Restrictions on Asset Holdings and Bank Capital Requirements

leverage ratio: amount of capital divided by the bank’s total assets

off-balance sheet activities: activities that involve trading financial instruments and generating income from fees, which do not appear on bank balance sheets but nevertheless expose banks to risk

Basel Committee on Banking Supervision: an agreement among banking officials from industrialized countries

Basel Accord: imposed risk-based capital requirements

regulatory arbitrage: banks keep on their books assets that have the same risk-based capital requirement but are relatively risky

Bank Supervision: Chartering and Examination

bank supervision (prudential supervision): overseeing who operates banks and how they are operated; important method for reducing adverse selection and moral hazard in the banking business

Assessment of Risk Management

Disclosure Requirements

Consumer Protection

Restrictions on Competition

See Table 1

See Table 1 (continued)

See Table 1 (continued again)

INTERNATIONAL BANKING REGULATION

Problems in Regulating International Banking

Summary

THE 1980s U.S. SAVINGS AND LOAN AND BANKING CRISIS? WHY?

See Figure 1

Early Stages of the Crisis

Later Stages of the Crisis: Regulatory Forbearance

regulatory forbearance: refraining from exercising the regulatory right to put an insolvent S&L out of business

goodwill: accounting entry to reflect value to the firm of its having special expertise or a particularly profitable business line

Competitive Equality in Banking Act of 1987

POLITICAL ECONOMY OF THE SAVINGS AND LOAN CRISIS

The Principal-Agent Problem for Regulators and Politicians

SAVINGS AND LOAN BAILOUT: THE FINANCIAL INSTITUTIONS REFORM, RECOVERY, AND ENFORCEMENT ACT OF 1989

FEDERAL DEPOIST CORPORATION IMPROVEMENT ACT OF 1991

BANKING CRISES THROUGHOUT THE WORLD

See Table 2

See Figure 2

Scandinavia

Latin America

Russia and Eastern Europe

Japan

China

East Asia

“Déjà Vu All Over Again”

Questions and Problems: 1, 3, 5, 7, 9, 11, 13, 15