1、Chapter 11Economic Analysis of Banking Regulation 2005 Pearson Education Canada Inc.11-2How Asymmetric InformationExplains Banking Regulation1. Government Safety Net and Deposit InsuranceA. Prevents bank runs due to asymmetric information: depositors cant tell good from bad banksB. Creates moral haz

2、ard incentives for banks to take on too much riskC. Creates adverse selection problem of crooks and risk-takers wanting to control banksD. Too-Big-to-Fail increases moral hazard incentives for big banks2. Restrictions on Asset HoldingsA. Reduces moral hazard of too much risk taking11-33. Bank Capita

3、l RequirementsA. Reduces moral hazard: banks have more to lose when have higher capitalB. Higher capital means more collateral for FDIC4. Bank Supervision: Chartering and ExaminationA. Reduces adverse selection problem of risk takers or crooks owning banksB. Reduces moral hazard by preventing risky

4、activities5. New Trend: Assessment of Risk Management6. Disclosure RequirementsA. Better information reduces asymmetric information problemHow Asymmetric InformationExplains Banking Regulation11-43. Bank Capital RequirementsA. Reduces moral hazard: banks have more to lose when have higher capitalB.

5、Higher capital means more collateral for CDIC4. Bank Supervision: Chartering and ExaminationA. Reduces adverse selection problem of risk takers or crooks owning banksB. Reduces moral hazard by preventing risky activitiesC. New trend: Assessment of risk management5. Disclosure RequirementsA. Better i

6、nformation reduces asymmetric information problemHow Asymmetric InformationExplains Banking Regulation11-5Major Banking Legislation in Canada11-6Major Banking Legislation in Canada 2005 Pearson Education Canada Inc.11-7Why a Banking Crisis in 1980s?Early Stages1. Managers did not have the required e

7、xpertise to manage risk2. The existence of CDIC, more opportunities for risk taking3. Because of the lending boom, bank activities were becoming more complicated. Regulators had neither the expertise nor the resources to monitor these activities appropriately4. 4. i , net worth of banks A. Insolvenc

8、ies B. Incentives for risk taking Result: Failures and risky loans Later Stages: Regulatory Forbearance1. Regulators allow insolvent banks to operate becauseA. Insufficient funds B. Sweep problems under rug11-8Political Economy ofthe Banking CrisisExplanation: Principal-Agent Problem1. Politicians i

9、nfluenced by bank lobbyists rather than publicA. Deny funds to close banksB. Legislation to relax restrictions2. Regulators influenced by politicians and desire to avoid blameA. Loosened capital requirementsB. Regulatory restrictions on risky asset holdingsC. Regulatory forbearance11-9CDIC Developme

10、nts CDIC insures each depositor at member institutions up to a loss of $60 000 per account All federally incorporated financial institutions and all provincially incorporated TMLs are members of the CDIC Insurance companies, credit unions, caisses populaires, and investment dealers are not eligible

11、for CDIC membership QDIB insures provincially incorporated institutions in Qubec and the other provinces have deposit insurance corporations that insure the deposits of credit unions in their jurisdiction CDIC insures only deposits in Canadian currency and payable in Canada; foreign currency deposit

12、s are not insured Not all deposits and investments offered by CDIC member institutions are insurable 11-10Not All Deposits Are InsurableInsurable deposits includeSavings and chequing accountsTerm deposits with a maturity date 5 yearsT-bills, bonds and debentures issued by governments and corporation

13、s (including the chartered banks)Investments in stocks, mutual funds, and mortgages.11-11Differential Premiums By-Law11-12Opting-Out By-LawPermits Schedule III banks, that accept primarily wholesale deposits (defined as $150 000 or more), to opt out of CDIC membership and therefore to operate withou

14、t deposit insuranceIt requires, however, an opted-out bank to inform all depositors, by posting notices in its branches, that their deposits will not be protected by the CDIC, and not to charge any early withdrawal penalties for depositors who choose to withdrawImplications:Minimizes CDIC exposure t

15、o uninsured depositsBy compensating only the insured depositors rather than all depositors, this legislation increases the incentives of uninsured depositors to monitor the risk-taking activities of banks, thereby reducing moral hazard risk 11-13Evaluating CDIC Limits on Scope of Deposit Insurance1. Eliminate deposit insurance entirely2. Lower limits on deposit insurance3. Eliminate too-big-to-fail4. CoinsurancePrompt Corrective Action1. Critics believe too many loopholes2. However: accountability increased