Banking regulation and deregulation : are banks unique?

Typescript (photocopy).This dissertation asks whether banking is unique in avoiding the costs associated with economic regulation or its inability to prove stable if left unregulated. Chapter II describes the inflexibility and inefficient incentives associated with bank regulation. It recounts the weaknesses exhibited by the current banking system that result from federal oversight. Chapter II also considers the market failure arguments. Banking is not a natural monopoly; it is not a public good; nor does it exhibit significant positive externalities. But it is commonly believed to embody negative externalities. Costly and asymmetric information is the reason. Managers of solvent banks are presumed to be unable to communicate reliable information quickly when questions arise about the institution's financial health, and depositors are expected to remove their funds rather than take a chance. But such behavior is costly to bank customers, depository stockholders, and managers. Incentives exist to develop ways to overcome this market weakness. That effort is the focus of Chapter III. Using the agency costs literature as a theoretical background, Chapter III also employs historical evidence from the free banking eras in the United States and Scotland to discover how bank customers protected their interests. These less regulated banking systems were more stable than many presume. Chapter IV examines deposit insurance. The federal deposit insurance system is at the root of the problems with the banking industry today. Chapter IV also contrasts the operations of federal deposit guarantors with a description of private deposit insurance. Finally, the chapter considers the viability of private deposit insurance. The dissertation concludes that banking is not unique. Rather banking is subject to the substantial costs imposed by central control. It has not developed market mechanisms to overcome the high information costs associated with bank loan portfolios because of continued depositor dependence on the federal safety net. Indeed, an argument can be made that a banking industry without extensive federal regulation would prove more stable and innovative than the existing system