"To Establish a More Effective Supervision of Banking": How the Birth of the Fed Altered Bank Supervision
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.
|Date of creation:||Feb 2011|
|Date of revision:|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
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.:
- Wheelock David C. & Kumbhakar Subal C., 1994.
"The Slack Banker Dances: Deposit Insurance and Risk-Taking in the Banking Collapse of the 1920s,"
Explorations in Economic History,
Elsevier, vol. 31(3), pages 357-375, July.
- 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.
- Alston Lee J. & Grove Wayne A. & Wheelock David C., 1994. "Why Do Banks Fail? Evidence from the 1920s," Explorations in Economic History, Elsevier, vol. 31(4), pages 409-431, October.
- Michael D. Bordo & Angela Redish, 1986.
"Why did the Bank of Canada Emerge in 1935?,"
NBER Working Papers
2079, National Bureau of Economic Research, Inc.
- Kool Clemens J. M., 1995. "War Finance and Interest Rate Targeting: Regime Changes in 1914-1918," Explorations in Economic History, Elsevier, vol. 32(3), pages 365-382, July.
- Robert B. Barsky & N. Gregory Mankiw & Jeffrey A. Miron & David N. Weil, 1987.
"The Worldwide Change in the Behavior of Interest Rates and Prices in 1914,"
NBER Working Papers
2344, National Bureau of Economic Research, Inc.
- 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.
- Fishe, Raymond P H & Wohar, Mark, 1990. "The Adjustment of Expectations to a Change in Regime: Comment," American Economic Review, American Economic Association, vol. 80(4), pages 968-76, September.
- Grossman, Richard S., 2007. "Fear and greed: The evolution of double liability in American banking, 1865-1930," Explorations in Economic History, Elsevier, vol. 44(1), pages 59-80, January.
- Miron, Jeffrey A, 1986. "Financial Panics, the Seasonality of the Nominal Interest Rate, and theFounding of the Fed," American Economic Review, American Economic Association, vol. 76(1), pages 125-40, March.
- James, John A, 1976. "The Conundrum of the Low Issue of National Bank Notes," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 359-67, April.
- 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.
- Bruce A. Champ & Neil Wallace & Warren E. Weber, 1992. "Resolving the national bank note paradox," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 13-21.
- 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
- Grossman Richard S., 1993. "The Macroeconomic Consequences of Bank Failures under the National Banking System," Explorations in Economic History, Elsevier, vol. 30(3), pages 294-320, July.
- Alfredo Gigliobianco (editor) & Gianni Toniolo (editor), 2009. "Financial market regulation in the wake of financial crises: the historical experience," Workshop and Conferences 1, Bank of Italy, Economic Research and International Relations Area.
- White, Eugene Nelson, 1985. "The Merger Movement in Banking, 1919–1933," The Journal of Economic History, Cambridge University Press, vol. 45(02), pages 285-291, June.
- Rockoff, Hugh T., 1975. "Varieties of Banking and Regional Economic Development in the United States, 1840–1860," The Journal of Economic History, Cambridge University Press, vol. 35(01), pages 160-181, March.
- White, Eugene, 1995. "Deposit insurance," Policy Research Working Paper Series 1541, The World Bank.
- 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.
- Moen, Jon & Tallman, Ellis W., 1992. "The Bank Panic of 1907: The Role of Trust Companies," The Journal of Economic History, Cambridge University Press, vol. 52(03), pages 611-630, September.
- Rockoff, Hugh, 1974. "The Free Banking Era: A Reexamination," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 6(2), pages 141-67, May.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:16825. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.