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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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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Adam B. Ashcraft & Morten L. Bech & W. Scott Frame, 2008. "The Federal Home Loan Bank System: the lender of next-to-last resort?," Staff Reports 357, Federal Reserve Bank of New York.
    2. Mertens, Karel, 2008. "Deposit rate ceilings and monetary transmission in the US," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1290-1302, October.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    7. 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.
    8. Ian V�¡squez, 2002. "A Retrospective on the Mexican Bailout," Cato Journal, Cato Journal, Cato Institute, vol. 21(3), Winter.
    9. Charles W. Calomiris & Gary Gorton, 1991. "The Origins of Banking Panics: Models, Facts, and Bank Regulation," NBER Chapters, in: Financial Markets and Financial Crises, pages 109-174 National Bureau of Economic Research, Inc.
    10. 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.
    11. 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.
    12. John V. Duca, 2005. "Making sense of elevated housing prices," Southwest Economy, Federal Reserve Bank of Dallas, issue Sep, pages 1, 7-13.
    13. 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.
    14. Peter Temin, 1991. "Lessons from the Great Depression," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262700441.
    15. 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.
    16. 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.
    17. 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.
    18. Hetzel,Robert L., 2008. "The Monetary Policy of the Federal Reserve," Cambridge Books, Cambridge University Press, number 9780521881326, October.
    19. repec:cto:journl:v:21:y:2002:i:3:p:369-393 is not listed on IDEAS
    20. Timberlake, Richard H., 1993. "Monetary Policy in the United States," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226803845, September.
    21. Nadezhda Malysheva & John R. Walter, 2010. "How large has the federal financial safety net become?," Working Paper 10-03, Federal Reserve Bank of Richmond.
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