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Chapter 15

Banking Regulation: Crisis and Response

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Pattern of Regulation

First stage: crisis in the banking industry. Second stage: government steps in to end

the crisis through regulation. Third stage: response by the financial

system. Fourth stage: regulatory response.

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Figure 15.1 Lender of Last Resort

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Anticompetitive Bank Regulation

The federal government sought banking stability by limiting competition.

Anticompetitive regulations created profit incentives for unregulated institutions.

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Figure 15.2 Interest Rate Ceilings

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Figure 15.3 Deposit Insurance

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Proposals for Regulatory Reform

Reduce the level of deposit insurance coverage. Narrow banking: insuring deposits in safe

assets. Deposit insurance can be provided by private

insurance companies. Risk-based pricing of deposit insurance Market-value accounting

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Lessons from Banking Regulation for Institutions

Distinction between banks and insurance companies for regulatory purposes may be outdated.

Problems resulting from deposit insurance protection also apply to pension funds.