James R. Barth

Bank Regulation and Supervision: What Works Best?

This paper uses our new database on bank regulation and supervision in 107 countries to assess the relationship between specific regulatory and supervisory practices and banking-sector development, efficiency, and fragility. The paper examines: (i) regulatory restrictions on bank activities and the mixing of banking and commerce; (ii) regulations on domestic and foreign bank entry; (iii) regulations on capital adequacy; (iv) deposit insurance system design features; (v) supervisory power, independence, and resources, (vi) loan classification stringency, provisioning standards, and diversification guidelines; (vii) regulations fostering information disclosure and private-sector monitoring of banks; and (viii) government ownership. The results, albeit tentative, raise a cautionary flag regarding government policies that rely excessively on direct government supervision and regulation of bank activities. The findings instead suggest that policies that rely on guidelines that (1) force accurate information disclosure, (2) empower private-sector corporate control of banks, and (3) foster incentives for private agents to exert corporate control work best to promote bank development, performance and stability.

Commercial Banking Structure, Regulation, and Performance: An International Comparison

This paper provides detailed information on banking structure, permissible banking activities, regulatory structure, deposit insurance schemes, and supervisory practices in each of the 15 European Union countries, as well as in Canada, Japan, Switzerland, and the United States. Comparisons across the countries show there is a wide range of banking structures and supervisory practices, and there is a roughly equal division between those countries that rely on the central bank as the chief banking supervisor and those that do not. In addition, although all of the countries currently have deposit insurance schemes, these schemes differ widely in many respects. Cross-country comparisons of the different aspects of banking do reveal one common characteristic, however. Almost all of the countries allow a wide range of banking activities, including underwriting, dealing, and brokering in both securities and insurance, and these activities can generally be conducted either directly in a bank or indirectly through a subsidiary of a bank, rather than through a holding company structure. The notable exceptions to this common tendency are the United States and Japan. An appendix presents an exploratory regression analysis illustrating a way in which empirical examinations of bank performance might be enriched by taking into account differences in permissible banking activities across countries.

Assessing the impact of varying economic conditions on federal reserve behavior

Abstract The purpose of this paper is to examine the nature of the response by the Federal Reserve to changes in economic conditions. Unlike previous studies, however, the specification of the reaction function for the Federal Reserve employed here will take account of the fact that the marginal response may vary with the severity of economic conditions. Whether or not this is the case is determined by developing a generalized spline estimator. It is found that the Federal Reserves reaction to economic conditions does indeed vary with the severity of these conditions. The implications of this finding are discussed.

Thrift deregulation and federal deposit insurance

The federal insurance funds were designed to cover all insured deposits but lacked a rule specifying how these deposits would be covered if a crisis occurred that swamped either insurance fund. The Congress apparently accepted the argument that strict enforcement and regulation could be used to reduce the probability of failure and thereby avoid large losses to the insurance fund. This flaw in the federal deposit insurance system has permitted insolvent institutions to remain open. The very poor performance of these institutions has skewed aggregate thrift performance in recent years, masking the performance of solvent institutions. A protracted debate has ensued centering on the cost of resolving troubled thrifts and whether healthy thrifts can pay these costs. This debate has drawn attention away from the potential value of the thrift charter.

The Evolution and Impact of Bank Regulations

This paper reassesses what works in banking regulation based on the new World Bank survey (Survey IV) of bank regulation and supervision around world. The paper briefly presents new and official survey information on bank regulations in more than 125 countries, makes comparisons with earlier surveys since 1999, and assesses the relationship between changes in bank regulations and banking system performance. The data suggest that many countries made capital regulations more stringent and granted greater discretionary power to official supervisory agencies over the past 12 years, but most countries have not enhanced the ability and incentives of private investors to monitor banks rigorously -- and several have weakened such private monitoring incentives. Although it is difficult to draw causal inferences from these data, and while there are material cross-country differences in the evolution of regulatory reforms, existing evidence suggests that many countries are making counterproductive changes to their bank regulations by not enhancing the ability and incentives of private investors to scrutinize banks.

The rational expectations approach to economic modelling

Abstract In the two decades since Muth (1961) advanced the concept of rational expectations, explorations of this conjecture have permeated all major areas of economic inquiry: This paper suggests that conventional formulations of the rational expectations postulate violate the axiomatic basis of modem statistical theory by confounding ‘objective’ and ‘subjective’ notions of probability. It is logically impossible to test the rationality of subjective expectations by comparison with observable frequencies. If a rational expectations conjecture is simply imposed on a model, conditions for identification of the model are more stringent than indicated in earlier literature. An alternative model for aggregation of subjective expectations is proposed.

The Role of Governments and Markets in International Banking Crises: The Case of East Asia

Throughout the world there have been a large number of significant banking problems in recent years. In East Asia since 1980 there have been varying degrees of banking problems in ten countries: China, Hong Kong, India, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan, and Thailand. Our goal in this paper is to try to explain what caused the recent difficulties and to suggest ways to prevent future problems. In doing so, we specifically focus on the banking crises in the region and attempt to explain what they have in common with other banking crises around the globe, including those in countries like the United States, with the most well-developed financial systems in the world. An important element in understanding these issues is assessing the appropriate mix of government intervention and market forces in designing a national financial system in a global marketplace.

Spillover Effects from the US Financial Crises: Some Time-Series Evidence from National Stock Returns

The 2007 financial and economic crisis that began in the United States and quickly spread around the world differed from earlier crises in a number of significant ways. This book examines the causes of these events in the US, and their impacts on North America, Europe, Asia and Australia.

The Reform of Federal Deposit Insurance

In the first essay, Calomiris argues that the most desirable means by which to achieve banking system stability is to permit unlimited branch banking combined with the type of privately administered formal deposit insurance programs of antebellum Indiana, Ohio, and Iowa. In the second essay, Barth and Bartholomew argue convincingly that the major culprit in the S&L crisis is the existing structure of the federal deposit insurance system. They take the view that the Financial Institutions Reform, Recovery and Enforcement Act was seriously flawed for its failure to adequately restructure the federal deposit insurance system. Brumbaugh and Litan express the view that due to the widespread use of accounting onventions to conceal balance sheet weaknesses, the number and assets of market-value insolvent banks cannot be known with any certainty. Kane argues that government deposit insurers have hidden or unacknowledged objectives and that these objectives conflict with the presumed long term goals of protecting depositors of modest means and preventing runs in a cost-effective manner. Romer and Weingast demonstrate how politicians benefited by keeping taxpayers uniformed about the thrift crisis and by establishing and enforcing a policy of forbearance. Chirinko and Guill quantitatively examine how macroeconomic shocks affect depository institutions. They argue that major problems can be encountered unless approaches to deposit-insurance reform and regulatory reform explicitly and carefully consider the impacts of such macroeconomic shocks on these institutions. Kaufman observes that, since 1974, the Federal Reserve has provided lender of last resort (LLR) assistance to prolong the life insolvent banks deemed too large to fail (TLTF). He argues that the LLR assistance in recent years has not saved most banks but has provided uninsured depositors time to flee without losses. It has frequently been argues that accounting techniques have played a significant part in the interaction of depository institutions and federal deposit insurance regulation. The last two papers in this book focus on the attributes of market-value accounting.

The Evolving Role of Regulation in the Savings and Loan Industry

The financial system in a modern economy facilitates the transfer of resources from savers to borrowers. Such a transfer allows the productive sectors to invest in capital necessary for growth. The financial system also allows consumers to adjust to variations in income so as to smooth consumption.