calomiris_gorton_panic

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Unformatted text preview: This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: Financial Markets and Financial Crises Volume Author/Editor: R. Glenn Hubbard, editor Volume Publisher: University of Chicago Press Volume ISBN: 0-226-35588-8 Volume URL: http://www.nber.org/books/glen91-1 Conference Date: March 22-24,1990 Publication Date: January 1991 Chapter Title: The Origins of Banking Panics: Models, Facts, and Bank Regulation Chapter Author: Charles W. Calomiris, Gary Gorton Chapter URL: http://www.nber.org/chapters/c11484 Chapter pages in book: (p. 109 - 174) The Origins of Banking Panics: Models, Facts, and Bank Regulation Charles W. Calomiris and Gary Gorton 4.1 Introduction The history of U.S. banking regulation can be written largely as a history of government and private responses to banking panics. Implicitly or explic- itly, each regulatory response to a crisis presumed a "model" of the origins of banking panics. The development of private bank clearing houses, the found- ing of the Federal Reserve System, the creation of the Federal Deposit Insur- ance Corporation, the separation of commercial and investment banking by the Glass-Steagall Act, and laws governing branch banking all reflect beliefs about the factors that contribute to the instability of the banking system. Deposit insurance and bank regulation were ultimately successful in pre- venting banking panics, but it has recently become apparent that this success was not without costs. The demise of the Federal Savings and Loan Insurance Corporation and state-sponsored thrift insurance funds and the declining com- petitiveness of U.S. commercial banks have had a profound effect on the de- bate over proper bank regulatory policy. Increasingly, regulators appear to be seeking to balance the benefits of banking stability against the apparent costs of bank regulation. This changing focus has provided some of the impetus for the reevaluation Charles W. Calomiris is an assistant professor of economics at Northwestern University and a research associate of the Federal Reserve Bank of Chicago. Gary Gorton is an associate professor of finance at the Wharton School, University of Pennsylvania. The authors would like to thank George Benston, Ben Bernanke, John Bohannon, Michael Bordo, Barry Eichengreen, Joe Haubrich, Glenn Hubbard, and Joel Mokyr for their comments and suggestions. 109 110 Charles W. Calomiris and Gary Gorton of the history of banking crises to determine how banking stability can be achieved at a minimum cost. The important question is: What is the cause of banking panics? This question has been difficult to answer. Theoretical mod- els of banking panics are intertwined with explanations for the existence of banks and, particularly, of bank debt contracts which finance "illiquid" assets while containing American put options giving debt holders the right to redeem debt on demand at par. Explaining the optimality of this debt contract, and of the put option, while simultaneously explaining the possibility of the appar-...
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This note was uploaded on 03/10/2012 for the course ECON 122 taught by Professor Nordhaus during the Fall '10 term at Yale.

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