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Monday, November 22, 2010

Banking regulation good/bad?

When I started the research for this post I believed I would find that there was a positive correlation between the amount of banking regulation and the number of bank failures.  What I ended up finding was the exact opposite. Now being a rational person I must accept that my first, small government inclination, was wrong at least as far as this data is concerned.

Now keep in mind that the pre-great depression period was unique in that it was really a wild west scenario.  That said, I looked back to into the data from 1890 up until 2010 for the below chart.  The data was hard to come by as there was no single source, that I could find. I pulled this data together from various sources so please understand that the finding are not 100% fact.  As far as the data involved, I believe it to be 95% accurate.  

It appears that there is a strong correlation between banking regulation and a decrease in the volume and frequency of bank failures.  The one unmeasured variable here that would/could significantly alter the judgement this chart provides is the total number of banks. I did built a secondary chart, however I was unable to find reliable data from 1890 through 1920, so the value of the second chart is limited.  

While I would not have expected this outcome I have to admit that my opinion of the value of a regulated banking industry has changed.  Now from a political and economic philosophy I am in favor of regulation as it does seem to work. That said I would prefer that regulation did not confer responsibility for failed banks.  If a bank fails it is my opinion that it should be be liquidated with shareholders wiped out.  Depositors should be made whole according to FDIC guidelines.  I firmly believe that another bank will either spring up to meet the now unmet need or an existing bank will jump into fill the void.  I am firmly in favor of not allowing banks to get so large that they represent a significant threat to the U.S. and global economy.   Interesting findings non-the-less and my mind has been changed with regard to the value of banking regulation. 


U.S. Department of the Treasury. Annual Report of the Comptroller of the Currency (1931), pp. 6, 8
Currency – Friedman and Schwartz  1963          
Board of Governors (1937)

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