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Quis Custodiet Ipsos Custodes?

Author

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  • Howard Bodenhorn

    (Lafayette College)

Abstract

In the wake of the S&L debacle, the LDC crisis and other systemic banking shocks, several recent proposals have called for regulatory reforms that emphasize the development of market incentives for both bankers and regulators. This article suggests that market-based reform may be feasible and desirable. In the absence of effective regulatory bodies, early nineteenth-century Americans relied on two specialized players in the financial market--banknote reporters and banknote brokers--for bank monitoring and information provision. Historical evidence provided by these banknote reporters suggests that reporters and brokers efficiently priced bank default risks. Brokers typically downgraded the debt issues of a troubled banks two years prior to its failure. In other cases, brokers often downgraded a bank's debt, forcing the bank to shape up and causing neither the particular bank's failure nor a widespread bank run. Finally, a formal test based on the so-called market model supports the contention that markets can effectively monitor financial institutions.

Suggested Citation

  • Howard Bodenhorn, 1998. "Quis Custodiet Ipsos Custodes?," Eastern Economic Journal, Eastern Economic Association, vol. 24(1), pages 7-24, Winter.
  • Handle: RePEc:eej:eeconj:v:24:y:1998:i:1:p:7-24
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    File URL: http://web.holycross.edu/RePEc/eej/Archive/eeconj/Volume24/V24N1P7_24.pdf
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    Cited by:

    1. Olivier Brossard & Hicham Chetioui, 2003. "Histoire longue : la naissance de la réglementation prudentielle, 1800-1945," Revue d'Économie Financière, Programme National Persée, vol. 73(4), pages 13-37.
    2. Bodenhorn, Howard, 2008. "Free banking and bank entry in nineteenth-century New York," Financial History Review, Cambridge University Press, vol. 15(02), pages 175-201, October.
    3. Jeremy Atack & Matthew S. Jaremski & Peter L. Rousseau, 2014. "Did Railroads Make Antebellum U.S. Banks More Sound?," NBER Chapters,in: Enterprising America: Businesses, Banks, and Credit Markets in Historical Perspective, pages 149-178 National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Bank; Banking; Financial Markets; S&L;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • N21 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: Pre-1913

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