Banking Crises Yesterday and Today

Provides an overview of the history of banking crises, as distinguished from financial crises, and the role of microeconomic and regulatory policy, both as causes of and as responses to the crises. Examines how politics can limit improved regulation

Bank Failures in Theory and History: The Great Depression and Other "Contagious" Events

Bank failures during banking crises, in theory, can result either from unwarranted depositor withdrawals during events characterized by contagion or panic, or as the result of fundamental bank insolvency. Various views of contagion are described and compared to historical evidence from banking crises, with special emphasis on the U.S. experience during and prior to the Great Depression. Panics or "contagion" played a small role in bank failure, during or before the Great Depression-era distress. Ironically, the government safety net, which was designed to forestall the (overestimated) risks of contagion, seems to have become the primary source of systemic instability in banking in the current era.

Universal banking and the financing of industrial development

In universal banking, large banks operate extensive networks of branches, provide many different services, hold several claims on firms (including equity and debt), and participate directly in the corporate governance of firms that rely on the banks for funding or as insurance underwriters. In this paper, the author contrasts the cost of financing industrialization in the United States and in Germany during the second industrial revolution. He explains that large production is typical of modern industrial practice, so the lessons from that period apply broadly to contemporary developing countries. The second industrial revolution involved many new products and technologies. Firms were producing new goods in new ways on an unprecedented scale. Therefore, they needed quick access to heavy financing. Finance costs for industry were lower in Germany than in the United States, because U.S.regulations prevented the universal banking from which Germany benefited. High finance costs retarded U.S. realization of its full industrial potential. The potential to expand quickly and reap economies of scale was greater in German industrialization. The cost of industrial financing began to decline when institutional changes came about that increased the concentration of financial market transactions. In recent decades, a combination of macroeconomic distress, international competitive pressure, and the creative invention of new financial intermediaries has helped the U.S. financial system overcome the regulatory mandate of financial fragmentation.Financial Intermediation,Payment Systems&Infrastructure,Banks&Banking Reform,Labor Policies,Decentralization,Banks&Banking Reform,Financial Intermediation,Economic Theory&Research,Environmental Economics&Policies,Housing Finance

Relationship Banking and the Pricing of Financial Services

We investigate how banking relationships that combine lending and underwriting services affect the terms of lending, through both loan supply- and loan demand-side effects, and the underwriting costs of debt and equity issues. We capture and control for firm characteristics, including differences in the sequences of firm financing decisions (which we argue are likely to capture important cross-sectional heterogeneity, and which previously have been ignored in the literature). We construct a structural model of lending, which separately identifies loan supply and loan demand. Our approach results in significant improvement in the explanatory power of our regressions when compared to prior studies. We find no evidence that universal banks under-price loans to win underwriting business. Instead, we find that universal banks charge premiums for loans and underwriting services to extract value from combined lending and underwriting relationships. We also find that universal banks (as opposed to stand alone investment banks) enjoy cost advantages in both lending and underwriting, irrespective of relationship benefits. Part of the advantage borrowers may enjoy from bundling products may be a form of liquidity risk insurance, which is manifested in a reduced demand for lines of credit. We also find evidence of a “road show� effect; firms that engage in debt underwritings enjoy loan pricing discounts on the loans that are negotiated at times close to the debt underwritings.

Historical Macroeconomics and American Macroeconomic History

What can macroeconomic history offer macroeconomic theorists and macroeconometricians? Macroeconomic history offers more than longer time series or special `controlled experiments.' It suggests an historical definition of the economy, which has implications for macroeconometric methods. The defining characteristic of the historical view is its emphasis on `path dependence': ways in which the cumulative past, including the history of shocks and their effects, change the structure of the economy. This essay reviews American macroeconomic history to illustrate its potential uses and draw out methodological implications. `Keynesian' models can account for the most obvious cycle patterns in all historical periods, while `new classical' models cannot. Nominal wage rigidity was important historically and some models of wage rigidity receive more support from history than others.A shortcoming of both Keynesian and new-classical approaches is the assumption that low-frequency change is exogenous to demand. The history of the Kuznets cycle shows how aggregate-demand shocks can produce endogenous changes in aggregate supply. Economies of scale, learning effects, and convergences of expectations-many within the spatial contexts of city building and frontier settlement-seem to have been very important in making the aggregate supply `path-dependent.' Institutional innovation (especially government regulation) has been another source of endogenous change in aggregate supply. The historical view's emphasis on endogenous structural change points in the analysis over short sample periods to identify the sources and consequences of macroeconomic shocks.

Banking Crises and the Rules of the Game

This paper is aimed to address when and why do banking crises occur, and whether financial reforms in reaction to crises are generally beneficial. It is argued that banking crises properly defined consist either of panics or of waves of costly bank failures, and they do not necessarily coincide. Risk-inviting microeconomic rules of the banking game that are established by government are viewed as the key necessary condition to producing a propensity for banking distress, whether in the form of a high propensity for banking panics or a high propensity for waves of bank failures.Banking, banking crises, financial reforms, microeconomic rules.

Monopoly-Creating Bank Consolidation? The Merger of Fleet and BankBoston

The merger of Fleet and BankBoston in September 1999 resulted in a regional New England lending market in which only one large, universal bank remained. We explore the extent to which that merger resulted in monopoly rents for the combined entity in some niches within the regional loan market. For small- and medium-sized middle-market borrowers, prior to the merger, Fleet and BankBoston charged unusually low loan interest rates, reflecting their ability to realize economies of scope and scale. After the merger, those cost savings were no longer passed on to medium-sized middle-market borrowers, which resulted in an increase in the average interest rate credit spreads to those borrowers of roughly one percent. Small-sized middle-market borrowers (which continued to enjoy the advantage of loan market competition from remaining small banks) maintained their low spreads. Our results suggest that it may be desirable for regulators to consider the concentration in lending markets in addition to deposit markets when evaluating mergers and structuring appropriate divestiture requirements.