Conference on Financial Market Regulation After Financial Crises: The Historical Experience

As the recent banking crisis in the United States has reminded us, effective supervision is an important instrument guaranteeing bank safety and integrity. Major reforms to bank supervision were engineered in 1990s in response to the crises of the 1980s, but these proved largely inadequate in the current crisis, raising many basic issues. What are the appropriate and effective instruments for bank supervision? Should supervision focus on re-enforcing market discipline or should it rely on regulators discretion and their independent evaluations? What is the trade-off between the costs of supervision and bank efficiency? Where should supervision be conducted: in an independent agency or within the central? This paper compares the five distinctive policy regimes governing American banking from 1863 to the present to provide some answers to these fundamental questions. Examination and supervision by government agencies appeared very early in the United States because of the guarantees provided to banknotes and the fostering of single-office banks. The fundamentals of bank supervision were established with the National Banking System in 1863-1864. In contrast, countries with branch banking systems, like Canada and Britain, relied on internal bank audits rather than a government regulator until late in the twentieth century. Consequently, the U.S.’s long experience provides an opportunity to study several distinct supervisory regimes. As the regulatory regimes have changed, the needs for supervision have been altered. In the first section, I lay out a taxonomy of regulation and supervision of the key elements of a policy regime and their theoretical justifications. I use this framework to examine the five major regimes that the United States has experienced in the last 150 years. The National Banking Era (1863-1913), is followed by the early years of th