ECONOMICS 0281
SUPPLEMENTARY
1. In Catherine
England's article "Agency Costs and Unregulated Banks: Could Depositors
Protect Themselves?":
a. Briefly explain the incentives of stockholders, depositors, and
managers for a bank and how creditor-stockholder conflicts might be resolved.
b.
Briefly explain how the three control mechanisms work to restrain bank managers
from engaging in excessively risky activities. Specifically:
(1) What kind of information sources might evolve in the absence
of regulation? (If depositors can hold auditors responsible for inaccurate
reports how will this affect the quality of the auditors report? If depositors
cannot hold government examiners responsible for inaccurate reports how will this
affect the quality of their reports?)
(2) What kind of third party monitors would evolve in the absence of
regulation?
(3) What
kind of contractual terms would help assure depositors that their agents were
not jeopardizing their deposits? (More capital, extended liability,
subordinated debt, delayed requests for liquidity,
mutual fund banking are some of the possibilities: choose a few and explain
them.)
c. Why would the failure of a bank (or banks) cause other bankers
to organize a system of mutual support? Why would depositors of other banks
learn to differentiate banks from one another in the absence of regulation?
What effects would this have on bank panics?
d. What
kind of historical support exists for
2. In
Charles Calomiris's article "Runs on Banks and
the Lessons of the Great Depression":
a. Why will otherwise solvent banks fail when an information
asymmetry exists between depositors and bank managers? (Calomiris
refers to this as the problem of the rational depositor with imperfect
information.)
b. In the
pre-Depression US what conditions made the banking system more vulnerable to
panics? How did this fact affect the ability of banks to form coalitions
designed to reduce the effect of panics?
c. From
the
d. What
role did the Chicago Clearinghouse play during the panic?
e. Would
deposit insurance solve the information asymmetry problem?
3. In Jith Jayaratne and Philip Strahan’s article “The Benefits of Branching Deregulation”:
a.
Explain some of the developments that contributed to the removal of geographic
barriers to bank expansion.
b. Why
were large banking organizations important in the relaxation of restrictions on
branching?
c. Do
banks perform better when branching restrictions are relaxed? What is the
evidence on loan losses, non-interest expenses, and loan rates?
d. Has
deregulation of banking led to increased concentration and increased market
power? Explain carefully.
4. In
William Shughart’s article “A Public Choice
Perspective on the Banking Act of 1933”:
a. What is the public interest justification for enacting Glass-Steagall?
b.
Briefly explain how commercial banks became involved in securities activities
before 1933.
c. How were banks affected by the panic of 1929-33 and how well did banks with
securities affiliates do compared with banks in general?
d. What
alternative explanation to the public interest theory does Shughart
propose?
e. What
interests did the commercial and investment bankers as well as the Treasury
have in separating commercial from investment banking?
5. In
Loretta Mester’s article “Repealing Glass-Stegall: The Past Points to the Future”:
a. Why was Glass-Steagall established?
b. What
are the arguments for and against repealing Glass-Steagall?
c. What
is the empirical evidence on conflict of interest and what does it imply about
repealing Glass-Steagall?
d. What
is the empirical evidence on organizational structure and how is that relevant
to the issue of repeal of Glass-Steagall?
6. In
Nicholas Economides, R. Glenn Hubbard, and Darius Palia's
article "Federal Deposit Insurance: Economic Efficiency or Politics?":
a. Why was deposit insurance established?
b. How
does the statistical evidence from state experience with deposit insurance and
role call votes on branching restrictions support the authors' hypothesis?
c. What
events occurred during the 1920s and early thirties that threatened the
survival of small banks? What did they do?
d. Why
did strong banks oppose the deposit insurance provisions of the Banking Act of
1933?
e. Is
government deposit insurance an effective way to reduce the problem of
financial crises?
7. In Catherine England's article "The
Savings and Loan Debacle":
a. How did prior regulation of the S&Ls
(tax incentives, interest-rate ceilings, asset portfolios limited to regions of
operation, and fixed rate mortgages) lay the
foundation of the crisis?
b. How
did rising costs and stagnant earnings create an industry that was insolvent by
$100 billion in 1980?
c. How
did government policies make this bad situation even worse? Why did
policymakers attempt to save the S&Ls? Explain.
d. Why
would policymakers act differently from private creditors?
e. How
did the government's response to the insolvent S&Ls
undermine the solvent S&Ls?
8. In George
Kaufman’s article "The U.S. Banking Debacle of the 1980s: A Lesson in
Government Mismanagement":
a. Why was deposit
insurance introduced in
1934?
b. What role did deposit insurance and other
regulatory restrictions play in the banking debacle of the 1980s?
c. What is
Structured Early Intervention and Resolution (SEIR)? Has it been effective?
Why? (Hint: Use public choice ideas here.)
d. What is the lesson to be learned from the
banking debacle? Can government solve the principal-agent problem and the
associated problem of asymmetric information that plagues political
institutions?
9. In Arnold Kling’s article “Not What They Had
in Mind”:
a.
What three lessons did regulators learn from the S&L Crisis and how did
these lessons/solutions contribute to the current crisis? (pp. 10-13)
b.
Kling argues that “from the 1960s to the early 1980s, mortgage securitization
was driven largely by anomalies in accounting treatment and regulation.”
Explain what he means here. (Hints: Explain what mortgage securitization is; an
anomaly is a deviation from a common practice.) (See pp. 16-18)
c.
Why did mortgage lending standards deteriorate and why didn’t regulators stop
this trend? (See pp. 17-19)
d.
How did the Basel Accord capital regulations create an advantage for
securitized mortgages? (See p. 23)
e.
Briefly explain how CDOs (private label mortgage
securities) and SIVs aided regulatory capital
arbitrage (helped to lower the actual capital held by financial institutions,
thereby increasing their leverage). (Be sure you know what Kling means by
regulatory capital arbitrage. See p. 23.)
f.
A key modification of the
g.
What role did the off balance sheet entities play in creating the crisis?
h.
Can financial regulation prevent (future) financial crises? Explain Kling’s
answer briefly.