Federal bank regulatory policy: a comment on Kareken
Article Abstract:
In responding to Kareken's criticism of existing policy concerning the safety of bank deposits, three major factors are noted: (1) economic activity, as a whole, is not severely impacted by bank failures than it is by business failures in other industries; (2) bank failures do not appear to be 'contagious'; and (3) since the introduction of federal deposit insurance in 1934, the banking industry has remained relatively stable. These contentions are supported by a review of the literature and empirical evidence showing the number of bank failures as being relatively small (as a percentage of number of banks operating). The faults that are found in the current systems are not of such great significance as to warrant the pessimism and changes suggested by Kareken.
Publication Name: The Journal of Business
Subject: Business, general
ISSN: 0021-9398
Year: 1986
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Regulating banks: comment on Kareken
Article Abstract:
In his paper of January 1986, Kareken dismisses the notion of increased capital ratio requirements as a means of safeguarding deposits. Contrary to this opinion, increasing capital ratio requirements can provide beneficial protection of deposits within the existing regulatory framework. A two tiered insurance system could is proposed as follows: (1) The FDIC would cover all deposits if a higher capital ratio requirement was met or (2) only a portion of deposits would be insured but higher capital ratios would not be required. The latter would be directed towards smaller banks who tend to have less access to capital markets but also tend to have smaller deposits. Such a system would assure deposit safety without radically altering the existing regulatory system.
Publication Name: The Journal of Business
Subject: Business, general
ISSN: 0021-9398
Year: 1986
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Safety and soundness as an objective of regulation of depository insurance: comment on Kareken
Article Abstract:
Kareken's criticism of deposit insurance policy can also be extended to savings and loan associations. During the period 1981 to 1982, savings and loan associations experience far greater economic troubles and insolvency that commercial banks. One of the major causes seem to have been explicit and implicit policy that would not allow these institutions to fail no matter how insolvent they were. This policy tended to encourage the assumption of very risky and questionable loans. If these institutions are to remain sound the policy should be altered so that a greater portion of risk is assumed by equity owner and subordinated creditors. By allowing insolvent and poorly managed institutions to fail, individually, the system as a whole will be sounder and safer.
Publication Name: The Journal of Business
Subject: Business, general
ISSN: 0021-9398
Year: 1986
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