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The point you raise here about how regulatory choices contributed to the crisis is spot on. But when you say this: > customers would have had an incentive to

by mcherm 5y ago

The point you raise here about how regulatory choices contributed to the crisis is spot on. But when you say this: > customers would have had an incentive to push back against the banking behaviours that led to these mass failures I'm not persuaded. Do you think that customers would have gotten savings and loan corporate officers to provide them with detailed documentation of the S&L's risk portfolio and then would have analyzed this in detail and chosen where to save their money based on the results? Because I don't believe ANY customers could have done that. As you point out, regulators didn't even do that, and they are experts whose full-time job is to do this kind of analysis!

eru 5y ago
Customers wouldn't generally do this themselves. They would outsource the job. Ie look for what reviews suggest etc. I can dig up how that worked in practice in the free banking eras in Scotland and Canada. > As you point out, regulators didn't even do that, and they are experts whose full-time job is to do this kind of analysis! In general the regulatory regime for banking is a bit weird in this respect: The government tends to give minimum quality standards for the balance sheets of eg banks, and then hands out an implicit (or explicit) guarantee that anything meeting these minimum standards is fine. In the regime I am suggesting the government would at most force banks to truthfully disclose what's on their balance sheet, but would not put up any minimum requirements. What happened in practice in Scotland and Canada is that banks would have very low reserves, for every 100 dollars in deposits and notes issued, they would keep around 2 dollars in gold around. (The equivalent today would be central bank reserves.) Basically, just enough to meet redemption demands in the short term. But to make up for that, they would keep very thick loss-absorbing equity cushions. Typically about one third of their balance sheet were financed by shareholder equity, and the other two thirds with deposits and bonds etc. Banks also put these equity cushions in their advertisements to prospective customers. So it seems they believed that customers cared about them. In some instances, shareholders and directors were also personally liable for losses beyond their paid-in capital. (Ie no limited liability shield for them.) Interesting enough, the latter is also how eg Goldman Sachs used to be run when it was still a partnership and not a public company. If you want to know more, have a look at eg http://files.libertyfund.org/files/2307/Selgin_1544_Bk.pdf http://files.libertyfund.org/files/2307/Selgin_1544_Bk.pdf (https://www.iea.org.uk/sites/default/files/publications/files/upldbook98pdf.pdf https://www.iea.org.uk/sites/default/files/publications/file... is also quite interesting, but on a slightly different topic.)

by mcherm 5y ago

eru 5y ago

Customers wouldn't generally do this themselves. They would outsource the job. Ie look for what reviews suggest etc. I can dig up how that worked in practice in the free banking eras in Scotland and Canada. > As you point out, regulators didn't even do that, and they are experts whose full-time job is to do this kind of analysis! In general the regulatory regime for banking is a bit weird in this respect: The government tends to give minimum quality standards for the balance sheets of eg banks, and then hands out an implicit (or explicit) guarantee that anything meeting these minimum standards is fine. In the regime I am suggesting the government would at most force banks to truthfully disclose what's on their balance sheet, but would not put up any minimum requirements. What happened in practice in Scotland and Canada is that banks would have very low reserves, for every 100 dollars in deposits and notes issued, they would keep around 2 dollars in gold around. (The equivalent today would be central bank reserves.) Basically, just enough to meet redemption demands in the short term. But to make up for that, they would keep very thick loss-absorbing equity cushions. Typically about one third of their balance sheet were financed by shareholder equity, and the other two thirds with deposits and bonds etc. Banks also put these equity cushions in their advertisements to prospective customers. So it seems they believed that customers cared about them. In some instances, shareholders and directors were also personally liable for losses beyond their paid-in capital. (Ie no limited liability shield for them.) Interesting enough, the latter is also how eg Goldman Sachs used to be run when it was still a partnership and not a public company. If you want to know more, have a look at eg http://files.libertyfund.org/files/2307/Selgin_1544_Bk.pdf http://files.libertyfund.org/files/2307/Selgin_1544_Bk.pdf (https://www.iea.org.uk/sites/default/files/publications/files/upldbook98pdf.pdf https://www.iea.org.uk/sites/default/files/publications/file... is also quite interesting, but on a slightly different topic.)