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Financial Consolidation: Dangers and Opportunities

  • Frederic S. Mishkin

This paper argues that although financial consolidation creates some dangers because it is leading to larger institutions who might expose the U.S. financial system to increased systemic risk, these dangers can be handled by vigilant supervision and a government safety net with an appropriate amount of constructive ambiguity. Financial consolidation also opens up opportunities to dramatically reduce the scope of deposit insurance and limit it to narrow bank accounts, thus substantially reducing the moral hazard created by the government safety net. Reducing the scope of deposit insurance, however, does not eliminate the need for a government safety net, and thus there is still a strong need for adequate prudential supervision of the financial system. Moving to a world in which we have larger, nationwide, diversified financial institutions and in which deposit insurance plays a very limited role, should improve the efficiency of the financial system. However, it is no panacea: the job of financial regulators and supervisors will continue to be highly challenging in the future.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6655.

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Date of creation: Apr 1999
Date of revision:
Publication status: published as Journal of Banking and Finance. 23 (1999) 675-691
Handle: RePEc:nbr:nberwo:6655
Note: ME
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  1. Economides, Nicholas & Hubbard, R Glenn & Palia, Darius, 1996. "The Political Economy of Branching Restrictions and Deposit Insurance: A Model of Monopolistic Competition among Small and Large Banks," Journal of Law and Economics, University of Chicago Press, vol. 39(2), pages 667-704, October.
  2. Frederic S. Mishkin, 1990. "Asymmetric Information and Financial Crises: A Historical Perspective," NBER Working Papers 3400, National Bureau of Economic Research, Inc.
  3. Frederic S. Mishkin, 1996. "Understanding Financial Crises: A Developing Country Perspective," NBER Working Papers 5600, National Bureau of Economic Research, Inc.
  4. Charles W. Calomiris & Eugene N. White, 1994. "The Origins of Federal Deposit Insurance," NBER Chapters, in: The Regulated Economy: A Historical Approach to Political Economy, pages 145-188 National Bureau of Economic Research, Inc.
  5. John H. Boyd & Mark Gertler, 1993. "U.S. Commercial Banking: Trends, Cycles, and Policy," NBER Working Papers 4404, National Bureau of Economic Research, Inc.
  6. Frederic S. Mishkin, 1996. "Bank Consolidation: A Central Banker's Perspective," NBER Working Papers 5849, National Bureau of Economic Research, Inc.
  7. Frederic S. Mishkin, 1994. "Preventing Financial Crises: An International Perspective," NBER Working Papers 4636, National Bureau of Economic Research, Inc.
  8. Haubrich, Joseph G., 1990. "Nonmonetary effects of financial crises : Lessons from the great depression in Canada," Journal of Monetary Economics, Elsevier, vol. 25(2), pages 223-252, March.
  9. White, Eugene, 1995. "Deposit insurance," Policy Research Working Paper Series 1541, The World Bank.
  10. Philip E. Strahan & James Weston, 1996. "Small business lending and bank consolidation: is there cause for concern?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 2(Mar).
  11. Joe Peek & Eric S. Rosengren, 1995. "Small business credit availability: how important is size of lender?," Working Papers 95-5, Federal Reserve Bank of Boston.
  12. Frederic S. Mishkin, 1997. "The causes and propagation of financial instability : lessons for policy makers," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 55-96.
  13. Arturo Estrella, 1995. "A prolegomenon to future capital requirements," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 1-12.
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