Lompat ke konten Lompat ke sidebar Lompat ke footer

Unit Banking, Bank Instability, and Deposit Insurance in the United States

Unit Banking, Bank Instability, and Deposit Insurance in the United States

The debate over federal insurance of deposits was conducted with reference to earlier efforts to insure bank liabilities. Insurance schemes were enacted by six states prior to the Civil War, and by eight states between 1907 and 1917. In all of these cases, insurance of banknotes or deposits was the mutual responsibility of banks, not the state governments.

The instability of small, unit banks and !he desire to insulate the economy from recurrent disruptions of bank failures and suspensions of convertibility motivated all of the deposit insurance systems created by the various states (Golembe 1960). 

Thus the evolution of the structure of the banking system is closely tied to the history of deposit insurance. The fragmentation and consequent instability of the American banking system are without parallel in the international history of banking. 

Experiments with large-scale banking-including the antebellum South and the federally chartered Banks of the United States-were early exceptions to reliance on 

1. It was widely understood that fractional-reserve banking, in and of itself, was not the source of the peculiar instability of banking in the United States. 

Other countries with fractional-reserve banking, but which lacked the fragmented banking system of the United States, avoided the episodes of widespread bank failure and suspension of convertibility that characterized the U.S. experience (Bordo 1985; Calomiris and Gorton 1991; Calomiris 1992b). 

2. The National Banking Acts of the 1860s provided federal government insurance of national banknotes. 

But this insurance was redundant protection because notes always were secured by 100 percent (or more) of their value in the form of deposits of US. government bonds held at the Treasury. Unlike the antebellum free-banking systems on which it was modelled, bond backing under the national banking system eliminated default risk on notes. 

The National Banking Acts were motivated by the financial exigencies of the Civil War, as well as long-standing Jacksonian policy proposals to create a uniform national currency backed by government bonds (Duncombe 1841). Of course, government bonds and national banknotes did suffer numeraire risk, notably during the period of greenback suspension and silver agitation (Calomiris 1993).

local, unit banks. Despite increasing interest by banks in consolidating and expanding branching networks, by the late nineteenth century restrictive state and federal regulations combined to make unit banking the norm. 

The U.S. banking system expanded until 1920 primarily by adding banks rather than by increasing the size of banks. By 1920, there were more than thirty thousand banks operating in the United States, or one bank for every 3,444 people. 

Thirteen years later less than half that number remained, as banks disappeared in the wake of the severe agricultural distress of the 1920s and the Great Depression. 

The structure of the American banking industry-thousands of mostly small banks operating in geographical isolation of one another-produced its propensity for panics and bank failures by reducing opportunities for diversification of portfolios and by making it difficult for banks to coordinate their joint response to financial crises.

The origins of unit banking and its persistence have been widely debated by historians. One of the most important preconditions for bank fragmentation was federalism and the early judicial and legislative precedents giving individual states authority to design their own banking systems and limit competition from institutions outside their state. 

In particular, the Supreme Court’s decision not to apply the commerce clause to banks and the Congress’s deference to state chartering powers set the stage for a banking system in which individual states could determine the industrial organization of banking within their borders. 

Why states would choose unit banking is less clear. Here attention has focused on the role of populist propaganda by rent-seeking unit bankers (White 1984) and on the benefits to some farmers from tying banks to particular locations as a form of loan insurance (Calomiris 1992b). 

The inherent fragility of a unit-banking system set the stage for further regulations to stabilize the system, notably deposit insurance. 

Every one of the fourteen states that enacted deposit insurance legislation from 1829 to 19 17 was a unit-banking state seeking to find a means of stabilizing its banking system. 

States that chose to imitate wholly or even partly the standard international practice of allowing branch banking eschewed insurance. 

Of the six antebellum state mutual-guarantee schemes, three had short lives and suffered large losses, while the other three suffered virtually no losses and survived for long periods (Golembe and Warburton 1958; Golembe 1960; Calomiris 1990). 

The varying degrees of success of these two groups of systems can be traced to the incentives created under their different regulatory regimes. 

The successful systems of Indiana, Ohio, and Iowa included limited numbers of banks (typically about thirty) with strong incentives to police one another and with broad powers of self-regulation and enforcement. 

Banks provided substantial mutual protection to one another without encouraging excessive risk taking. These systems were eliminated by federal legislation that imposed a 10 percent annual tax on state banknote issues (their primary liabilities) to foster the newly created national banking system. 

The other antebellum insurance experiments (of New York, Vermont, and Michigan) all had become insolvent by the 1840s as the result of common problems of design that induced adverse selection and moral hazard, encouraging risk taking within the insured system. 

The large numbers of members and limited mutual liability encouraged free riding, and the government provided little effective supervision and regulation. 

Protection to noteholders and depositors under these three mutual-guarantee systems was limited; protection rested on the ability and willingness of surviving banks to remain in the systems to fund the losses of failed banks. 

Bank failures resulted in substantial losses to noteholders and depositors. Stimulated by the disruptions from the Panic of 1907, states began a second round of experimentation with mutual-guarantee systems (White 1983; Calomiris 1990, 1992a).’ 

Like the antebellum systems, all the post-1907 state insurance systems arose in unit-banking states dominated by large numbers of small, rural banks. 

White (I 983, 200) found that the probability of passage of deposit insurance at the state level was positively affected by the presence of unit-banking laws, small bank size, and a high bank-failure rate. Unfortunately, the postbellum systems all adopted the design features of the failed antebellum systems, including limited mutual liability and government rather than private regulation. 

In a sense, this imitation is not surprising. A successful system of self-regulating banks with unlimited mutual liabilitylike those of Indiana, Ohio, and Iowa-would not have been feasible for state unit-banking systems of hundreds of unit banks like those of the postbellum deposit insurance states. 

In systems of hundreds of banks, banks would have little incentive to expend resources policing one another, since the benefits one bank would receive from monitoring another would be shared with too many others banks, while the costs of monitoring would be borne privately. 

Thus the decision to imitate the design of the failed antebellum systems was consistent with the industrial structure of banking in these large, agricultural states dominated by large numbers of unit banks. 

These systems suffered large losses and went bankrupt in the 1920s. Calomiris (1990, 1992a) and Wheelock (1992) trace these large losses to the exces

3. At the federal level, protection was offered to depositors via the postal savings system, which was also established in the wake of the Panic of 1907 (Kemmerer 1917). 

Postal savings was the limited remedy to banking instability offered by the victorious Republicans after the election of 1908. The Democratic platform had contained a proposal for federal deposit insurance (O’Hara and Easley 1979, 742-43). 

To limit competition between postal savings and bank deposits, postal savings paid low interest, was restricted to small deposits, and was largely reinvested in the banking system. 

While the government stood behind postal savings deposits (many of which were deposited in commercial banks), this did not expose the government to significant risk because banks were required to secure postal savings account deposits with municipal, state, and federal bonds specified by Congress (Zaun 1953, 27-28). 

Thus government backing for postal savings was redundant in the same way as the backing for national banknotes. Banks profited from the spread they earned on postal savings deposits (equal to the yield on collateral bonds, less the 2 percent interest paid to the post office on the accounts). 

This profit turned negative during the Great Depression, as bond yielda fell. The result was a switch from the investment of postal savings deposits in banks (who refused them) to direct investment of postal savings in government bonds sive risk taking of banks in insured states during the World War I agricultural boom. 

Insured banking systems grew at an unusually high rate in the form of small banks with relatively low capital. In the face of the post- 1920 agricultural bust, insured banks failed at a high rate and with the lowest asset values relative to deposit claims of any banks in the 1920s. 

State banks in agricultural states all suffered from the large price and land-value declines of the 1920s, but the risk taking encouraged by deposit insurance added greatly to the costs state banks suffered in the face of the decline. 

At the same time that the post- 1907 state insurance systems collapsed, conditions in the banking industry began to change in a direction that threatened the future of unit banking. Up to 19 14, the banking system had been expanding rapidly, which, under the prohibition of branch banking in most states, resulted in the proliferation of small unit banks. 

Beginning with the postwar recession, many banks failed in agricultural areas. They continued to fail at historically high rates, even as the rest of the economy thrived in the mid- 1920s. 

Surviving banks faced tougher competition as legal barriers to branching were weakened under pressure from larger urban banks and by efforts to allow surviving banks a means to fill the gaps created by the many rural bank failures. 

The proven survivability of branching banks during the 1920s in contrast to the failures of the insured unit-banking systems also favored expanded branching and consolidation (White 1983; Calomiris 1992a, 1992b). 

Table 5.1 provides data on bank industry trends during the 1920s. As the number of banks declined, the number of branches began to rise and mergers became more common. 

Banks began to diversify their activities, moving into a variety of financial services, including trust services, brokerage, and investment banking. A larger, more diversified, and safer portfolio (White 1986) and the availability of a variety of new services attracted customers (Calomiris 1994). 

Smaller unit banks found it hard to compete in this environment and turned to the political arena to secure economic protection.

Bona Pasogit
Bona Pasogit Content Creator, Video Creator and Writer

Posting Komentar untuk "Unit Banking, Bank Instability, and Deposit Insurance in the United States "