Banking Theory, Deposit Insurance, and Bank Regulation

Abstract

The last several years have seen extensive change in the U.S. banking industry. ' In the 1950s and 1960s the banking industry was a symbol of stability. By contrast, recent years have seen the greatest frequency of bank failures since the Great Depression. During the same period, the banking environment has undergone the most significant changes since 1933, when the Glass-Steagall Act laid down the ideas underlying the modern regulatory environment. The recent changes include new competitors to banks, new technology, new floating rate contracts, increases in interstate banking, and various regulatory reductions and changes. Some of these changes are accelerated by the current high rate of bank failure; many of the changes are driven by technology and competition and are inevitable. One implication of all these changes is that we now face policy decisions that will affect the future course of the banking industry. Since the current environment is largely outside our past experience, we need theory to extrapolate from past experience to our current situation. The purpose of this paper is to summarize the policy implications of existing economic models of the banking industry and to examine some current recommendations in light of the theory. Our conclusions contrast with the traditional view in economics and with several conclusions in Kareken's (in this issue) lead piece in this symposium. Most references to banks in the microeconomics literature have not looked at banking at the industry level. The bank management litera-

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 252 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.