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“To Establish a More Effective Supervision of Banking”: How the Birth of the Fed Altered Bank Supervision

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  • Eugene N. White

Abstract

Although bank supervision under the National Banking System exercised a light hand and panics were frequent, depositor losses were minimal. Double liability induced shareholders to carefully monitor bank managers and voluntarily liquidate banks early if they appeared to be in trouble. Inducing more disclosure, marking assets to market, and ensuring prompt closure of insolvent national banks, the Comptroller of the Currency reinforced market discipline. The arrival of the Federal Reserve weakened this regime. Monetary policy decisions conflicted with the goal of financial stability and created moral hazard. The appearance of the Fed as an additional supervisor led to more “competition in laxity” among regulators and “regulatory arbitrage” by banks. When the Great Depression hit, policy-induced deflation and asset price volatility were misdiagnosed as failures of competition and market valuation. In response, the New Deal shifted to a regime of discretion-based supervision with forbearance.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16825.

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Date of creation: Feb 2011
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Handle: RePEc:nbr:nberwo:16825

Note: DAE ME
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  1. David C. Wheelock & Subal C. Kumbhaker, 1992. "The slack banker dances: deposit insurance and risk-taking in the banking collapse of the 1920s," Working Papers 1992-002, Federal Reserve Bank of St. Louis.
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  5. Alesina, Alberto & Stella, Andrea, 2010. "The Politics of Monetary Policy," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 18, pages 1001-1054 Elsevier.
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  8. Grossman, Richard S, 2001. "Double Liability and Bank Risk Taking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 143-59, May.
  9. Caporale, Tony & McKiernan, Barbara, 1998. "Interest Rate Uncertainty and the Founding of the Federal Reserve," The Journal of Economic History, Cambridge University Press, vol. 58(04), pages 1110-1117, December.
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  15. Barsky, Robert B. & Mankiw, N. Gregory & Miron, Jeffrey A. & Weill, David N., 1988. "The worldwide change in the behavior of interest rates and prices in 1914," European Economic Review, Elsevier, vol. 32(5), pages 1123-1147, June.
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Cited by:
  1. Michael D. Bordo & Angela Redish & Hugh Rockoff, 2011. "Why didn’t Canada have a banking crisis in 2008 (or in 1930, or 1907, or ...)?," NBER Working Papers 17312, National Bureau of Economic Research, Inc.
  2. Mitchener, Kris James, 2014. "The Evolution of Bank Supervision: Evidence from U.S. States," CAGE Online Working Paper Series 181, Competitive Advantage in the Global Economy (CAGE).
  3. repec:cge:warwcg:180 is not listed on IDEAS
  4. repec:cge:warwcg:181 is not listed on IDEAS
  5. Bordo, Michael D., 2012. "Could the United States have had a better central bank? An historical counterfactual speculation," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 597-607.

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