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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.

Suggested Citation

  • Eugene N. White, 2011. ""To Establish a More Effective Supervision of Banking": How the Birth of the Fed Altered Bank Supervision," NBER Working Papers 16825, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:16825
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Kris James Mitchener & Matthew Jaremski, 2014. "The Evolution of Bank Supervision: Evidence from U.S. States," NBER Working Papers 20603, National Bureau of Economic Research, Inc.
    3. Hale, Galina & Lopez, Jose A., 2017. "Monitoring Banking System Fragility with Big Data," Working Paper Series 2018-1, Federal Reserve Bank of San Francisco.
    4. Michael D. Bordo & Angela Redish & Hugh Rockoff, 2015. "Why didn't Canada have a banking crisis in 2008 (or in 1930, or 1907, or …)?," Economic History Review, Economic History Society, vol. 68(1), pages 218-243, February.
    5. 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.
    6. 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).

    More about this item

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • N11 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: Pre-1913
    • N12 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: 1913-
    • N2 - Economic History - - Financial Markets and Institutions

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