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Creator: Smith, Bruce D., d. 2002. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 228 Abstract:
"Summary of Recommendations: . . . Repeal present control by the System over interest rates that member banks may pay on time deposits and present prohibition of interest payments by member banks on demand deposits." Milton Friedman (1960, p. 100) "I conclude that the over-all monetary effects of ceiling regulations are small and easy to neutralize by traditional monetary controls. The allocative and distributive effects are, however, unfortunate. The root of the policy was an exaggerated and largely unnecessary concern for the technical solvency of savings and loan associations." James Tobin (1970, p. 5) The regulation of deposit interest rates has received little support from economists. The same is true for the original rationale for such regulation: that bank competition for deposits generates inherent "instability" in the banking system. This paper develops an "adverse selection" model of banking in which this rationale is correct. Moreover, in this model instability in the banking system can arise despite the presence of a "lender of last resort," and despite the absence of any need for "deposit insurance." However, in the world described, the regulation of deposit interest rates is shown to be an appropriate response to "instability" in the banking system. Finally, it is argued that "adverse selection" models of deposit interest rate determination can confront a number of observed phenomena that are not readily explained in other contexts.
Palabra clave: Banking Act, Banking Act of 1933, Banking panics, Banking Act of 1935, Risk, Bank regulation, Instability, and Unregulated banks Tema: D82 - Information, knowledge, and uncertainty - Asymmetric and private information, E42 - Money and interest rates - Monetary systems ; Standards ; Regimes ; Government and the monetary system ; Payment systems, G11 - General financial markets - Portfolio choice ; Investment decisions, and G21 - Financial institutions and services - Banks ; Other depository institutions ; Micro finance institutions ; Mortgages
Creator: Williamson, Stephen D. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 405 Abstract:
A model is constructed where banks provide access to a communication technology which facilitates trade. Bank liabilities may coexist with alternative means of payment in equilibrium, and there exist regions of the parameter space where banking dominates the payments system and where physical exchange media dominate. The model is consistent with some observations concerning the role of the banking system in economic development, and with characteristics of banking crises. In particular, in early stages of economic development: 1) rapid output growth is accompanied by an increasing share of banking in transactions activity and 2) there are recurrent banking "panics" where reductions in measured aggregate output coincide with increases in the use of alternative means of payment relative to bank liabilities. In later stages of development, growth slackens off, the share of banking in the payments system stabilizes and the economy is less likely to be subject to banking panics.
Prepared for a conference on "Models of Money and Intermediation," University of Western Ontario, October 1988. A preliminary version was presented at the NBER Summer Institute, July 1988.
Palabra clave: Communication cost, Financial panic, Banks, Communication technology, and Banking panics Tema: O33 - Technological change ; Research and development - Technological change : Choices and consequences ; Diffusion processes and G21 - Financial institutions and services - Banks ; Other depository institutions ; Micro finance institutions ; Mortgages