Randall S. Kroszner

Were the Good Old Days That Good? Changes in Managerial Stock Ownership Since the Great Depression

We document that ownership by officers and directors of publicly-traded firms is on average higher today than earlier in the century. Managerial ownership rises from 13 percent for the universe of exchange-listed corporations in 1935, the earliest year for which such data exist, to 21 percent in 1995. We examine in detail the robustness of the increase and explore hypotheses to explain it. Higher managerial ownership has not substituted for alternative corporate governance mechanisms. Lower volatility and greater hedging opportunities associated with the development of financial markets appear to be important factors explaining the increase in managerial ownership.

Corporate Campaign Contributions, Repeat Giving, and the Rewards to Legislator Reputation

Are politicians who follow a strategy of reputational development rewarded with high levels of corporate campaign contributions? Reputational clarity could help to reduce uncertainty about a candidate and lead to greater campaign contributions from favored interests. Alternatively, such clarity could alienate those who disagree and prevent the politician from obtaining contributions from groups on both sides of an issue. We outline an approach that considers conditions under which a politician would or would not prefer reputational development and policy‐stance clarity and consistency in the context of repeat dealing with special interests. Our proxy for reputational development is the percentage of repeat givers to a legislator. Using data on corporate political action committee (PAC) contributions to members of the U.S. House during the seven electoral cycles from 1983/84 to 1995/96, we explore a variety of alternative hypotheses and find that greater reputational development is rewarded with greater PAC contributions.

On the Political Economy of Banking and Financial Regulatory Reform in Emerging Markets

This paper synthesizes literature on the economics of regulation and positive political economy to provide a framework for understanding why certain types of banking and financial regulations arise in particular circumstance and what causes them to change. The analysis focuses on competition among rival interest groups. Technological and economic shocks alter the value of regulation to existing interest groups and their lobbying power, and these shocks recently have been tending to tip the balance in favor of the deregulation. The structure of the public decision-making process plays a role by affecting the willingness of different groups to organize and the influence of those groups as lobbyists. The fiscal demands of the government play an important role. Academics also may play a role by generating ideas and arguments that can increase or decrease the effectiveness of an interest groups lobbying effort. The positive analysis of how regulatory change evolves may ultimately provide normative guidance for those who wish to implement lasting policy reforms in both emerging and developed economies.

Log-rolling and economic interests in the passage of the Smoot-Hawley tariff

We analyze Senate roll-call votes concerning tariffs on specific goods in order to understand the economic and political factors influencing the passage of the Smoot-Hawley Tariff Act of 1930. Contrary to recent studies emphasizing the partisan nature of the Congressional votes, our reading of the debates in the Congressional Record suggests that the final, party-line voting masks a rich vote- trading dynamic. We estimate a logit model of specific tariff votes that permits us to identify (a) important influences of specific producer beneficiaries in each Senators constituency and (b) log- rolling coalitions among Senators with otherwise unrelated constituency interests which succeeded in raising tariff rates.

Stock market responses to bank restructuring policies during the East Asian crisis

The East Asian crisis began in Thailand in mid-1997 when an ailing financial sector, a slowdown in exports, and large increases in central bank credit to weak financial institutions, triggered a run on the baht. Then the crisis spread to other countries in the region, as common vulnerabilities, and revaluations of risk in emerging markets, triggered large capital flows. To better understand the impact of different policy responses to financial crises, the authors investigate how stock markets in East Asian countries reacted to the initial policy announcements of bank, and financial restructuring - especially how banking, and non-financial sectors in Indonesia, the Republic of Korea, Malaysia, and Thailand, fared in response to announcements of different restructuring measures. They find that prices of bank stocks, responded positively to announcements about government guarantees of bank liabilities. Non-financial companies gained in value when guarantees were announced, but their stock prices were negatively affected by announcements favoring public re-capitalization schemes, and generous liquidity support programs. Possibly the market was concerned that public funds per se, would not restore the health of the financial sector - that they would not be sufficient, or would not be used to restructure bank balance sheets, and operations, and allow banks to engage in meaningful corporate restructuring. The announcements of increased public support, have been viewed as a signal that the financial institutions were in a financially weaker position than previously thought.

Congressional Committees as Reputation-building Mechanisms

Interest groups cannot enforce contracts with legislators to work in their favor since fee-for-service agreements would be considered bribery. When such contracts are not available, a system of specialized, standing committees can provide a second-best way to maximize contributions, since such a system facilitates repeated interactions and reputational development between PACs and members of the relevant committees. Using data on PAC contributions by competing financial services interests to members of the House Banking Committee, we find evidence consistent with key implications of our model of committees as reputational-development devises. We then interpret important episodes in the evolution and development of the committee system during the twentieth century from the perspective of our theory. We focus on the revolt against House Speaker Cannon, which resulted in the birth of the modern committee system, and the post-Watergate reforms. We also consider broader implications of this approach for analyzing term limits, corruption, and party strength. JEL classifications: D72, D78, G28.

Lessons from Financial Crises: The Role of Clearinghouses

This article investigates the historical development of clearinghouses and their ability to deal with financial crises. The article first reviews the role of bank clearinghouses in the Panic of 1907, the final crisis of the National Banking Era that led to the founding of the Federal Reserve, and examines how the clearinghouses responded by issuing transactions media, despite legal obstacles, and providing coinsurance among the members. The article then traces the late nineteenth and twentieth century evolution of clearinghouses at futures exchanges to understand how they promote stability and withstand crises by mutualizing risks among members. The key feature of both bank and futures clearinghouses is the effective integration of the members during times of distress, illustrating how the private markets develop institutions and contracts to manage risk and respond to financial crises.

The Political Economy of Banking and Financial Regulation in the United States

This chapter provides a positive political-economy explanation of the origins of and recent changes in significant aspects of banking and financial regulation in the United States. Geographic restrictions on bank expansion originate in states’ public financing needs during the nineteenth century. Beneficiaries of these restrictions then can maintain them until a recent series of technological, legal, and economic shocks cause a change in the political equilibrium, thereby permitting the interests in favor of deregulation to triumph. Competition among rival interests also explains the persistence of the restrictions of bank powers in such areas as securities underwriting. Continuing shocks in financial services, however, are likely to precipitate a breakdown of the current political equilibrium in favor of allowing increased banking powers.

The Motivations Behind Banking Reform

In the past few decades, most state legislatures fundamentally reformed and deregulated the banking industry by adopting new laws on branching and other banking activities. Because those efforts took place on a state-by-state basis, the reforms offer a rich laboratory in which to investigate what drives deregulation. Did banking deregulation happen first in states in which people would most benefit from reform, or in states in which well-organized political groups had the most to gain from deregulation? The authors analysis of branching deregulation suggests the latter explanation, known as the private interest theory of government action, best accounts for the pattern of banking reform that unfolded in the last 30 years.

How Should Financial Institutions and Markets Be Structured? Analysis and Options for Financial System Design

This paper analyzes the consequences of alternative financial structures for financial efficiency and stability. The focus is on the organizational structure of banks. Alternative bank structures range from `narrow banks` to broad `universal banks. ` Each banking structure is assessed in its ability to satisfy the objectives of efficiency and stability in the financial system stability, economies of scale and scope, competition, avoiding regulatory capture, conflicts of interest and political manipulation, corporate control and management of financial distress, and monetary control. No one reform is appropriate for all countries, and no single reform guarantees that the objectives will be attained or maintained.