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Should increased regulation of bank risk-taking come from regulators or from the market?

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  • Robert L. Hetzel
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    Abstract

    The heavy losses in bank asset portfolios do not reflect an inherent failure of markets to monitor risk adequately but rather the perverse incentives of the financial safety net to excessive risk-taking. The unsustainable rise in house prices and their subsequent sharp decline derived from the combination of a public policy to expand home ownership to unrealistic levels and from a financial safety net that encouraged excessive risk-taking by banks.

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    File URL: http://richmondfed.org/publications/research/economic_quarterly/2009/spring/pdf/hetzel1.pdf
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    Bibliographic Info

    Article provided by Federal Reserve Bank of Richmond in its journal Economic Quarterly.

    Volume (Year): (2009)
    Issue (Month): Spr ()
    Pages: 161-200

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    Handle: RePEc:fip:fedreq:y:2009:i:spr:p:161-200:n:v.95no.2

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    Keywords: Banks and banking ; Risk;

    References

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    1. Charles W. Calomiris & Gary Gorton, . "The Origins of Banking Panics: Models, Facts, and Bank Regulation," Rodney L. White Center for Financial Research Working Papers 11-90, Wharton School Rodney L. White Center for Financial Research.
    2. John V. Duca, 2005. "Making sense of elevated housing prices," The Southwest Economy, Federal Reserve Bank of Dallas, issue Sep, pages 1, 7-13.
    3. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
    4. William Roberds, 1995. "Financial crises and the payments system: lessons from the National Banking Era," Economic Review, Federal Reserve Bank of Atlanta, issue Sep, pages 15-31.
    5. Hetzel,Robert L., 2008. "The Monetary Policy of the Federal Reserve," Cambridge Books, Cambridge University Press, number 9780521881326.
    6. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    7. Adam Ashcraft & Morten L. Bech & W. Scott Frame, 2009. "The Federal Home Loan Bank System: the lender of next-to-last resort?," Working Paper 2009-04, Federal Reserve Bank of Atlanta.
    8. John R. Walter & John A. Weinberg, 2002. "How Large Is the Federal Financial Safety Net?," Cato Journal, Cato Journal, Cato Institute, vol. 21(3), pages 369-393, Winter.
    9. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
    10. Ellis W. Tallman & Jon R. Moen, 1990. "Lessons from the panic of 1907," Economic Review, Federal Reserve Bank of Atlanta, issue May, pages 2-13.
    11. Timberlake, Richard H., 1993. "Monetary Policy in the United States," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226803845, August.
    12. George G. Kaufman, 1990. "Are Some Banks Too Large To Fail? Myth And Reality," Contemporary Economic Policy, Western Economic Association International, vol. 8(4), pages 1-14, October.
    13. Todd Keister & Antoine Martin & James McAndrews, 2008. "Divorcing money from monetary policy," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 41-56.
    14. Mertens, Karel, 2008. "Deposit rate ceilings and monetary transmission in the US," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1290-1302, October.
    15. Charles W. Calomiris & Joseph R. Mason, 2003. "Fundamentals, Panics, and Bank Distress During the Depression," American Economic Review, American Economic Association, vol. 93(5), pages 1615-1647, December.
    16. Nadezhda Malysheva & John R. Walter, 2010. "How large has the federal financial safety net become?," Working Paper 10-03, Federal Reserve Bank of Richmond.
    17. Michael D. Bordo & David C. Wheelock, 1998. "Price stability and financial stability: the historical record," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 41-62.
    18. Timberlake, Richard H, Jr, 1984. "The Central Banking Role of Clearinghouse Associations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(1), pages 1-15, February.
    19. Gerald P. Dwyer, Jr., 1996. "Wildcat banking, banking panics, and free banking in the United States," Economic Review, Federal Reserve Bank of Atlanta, issue Dec, pages 1-20.
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