Interstate banks provide convenience to customers. Lower cost due to economies of scales. More competition in banking sectors.
Drawbacks of branching of banks:
(1) we see a draining of deposit funds from local communities to other parts of the country.
(2) Banks become much larger and resemble "too big to fail".
Regulation in financial sectors may be the clearest test of how regulation works in a market. In other words, if regulation works anywhere, it must be the case that it works best in terms of financial market. Reason: Compared to other sectors, transparency in financial market is higher. Banks report vast quantities of data to regulators, and it is very easy for regulators to check those numbers.
Why is financial regulation doomed to fail?
(1) Ordinary people
don't care about risks in their banks---- most people cite location as
the most important reason for choosing a bank.
(2) Standardization: getting a mortgage or a loan is the same process no matter the banks are. Different banks evaluate them in the same way, following the guide lines of the Fed. The influence of the Fed goes beyond banks' balance sheets because banks follow the guidelines of the Fed.
(3) Less competition--regulation puts barrier in the way of starting a new bank.
(4) Less choice--can't share its own currency. (But most banks still provide checking account, which is private money, consisting a large chunk of the whole money supply in the economy.)
The creation of derivatives doesn't eliminate the risks. What we should care about is to when risks will explode and harm other people. It's not possible to prevent crisis from happening.
The point of regulation is to protect the sanctity of the payment system.
How to regulate
Bank of International Settlements:central bank to all the world's central banks
Issuance of guideline: Basel I, II and III. Suggested guidelines that are supposed to be adopted by central banks.
The most important thing that BIS does is to set up the capital adequacy requirement to prevent banks from recklessly investing with insufficient risk capital.
Basel I: any government issued securities are 100 percent risk-free. any country securities are safe.
A L
Greek bonds deposits
100 100
Capital requirement for the most risky lending: commercial loan 8% capital requirement (100% risk weight)
Mortgage loans are deemed to be safer: capital requirement is 4% (50% risk weight)
GSE securities: capital requirement 1.6% (20% risk weight)
For a bank, if it originates a mortgage, sells it to Fannie, (btw get a fee for selling the mortgage), and buys it back in a bundle of MBS, that very same mortgage would only require 1.6% of the capital requirement.
NOW the capital requirement for all mortgage is 1.6% requirement, including prime and subprime mortgages.
Commercial banks get money in 3 ways from this process: interest on mortgage, fee for selling mortgage to the Fannie in the first place, a lower capital requirement
SPV: off-balance sheet activities to avoid any capital requirement. (Bearstone)
Investment banks were not totally reckless:
(1)double A and triple A mortgages were demanded the same capital requirement, and double A mortgages had a higher yield, but most investment banks still chose triple A mortgages
(2) greed is about making money rather than losing money
(3) the problem may be overconfidence
(4) they bought CDSs for protection
In a free market, banks will use different algorithms to evaluate the mortgages, there may even be speicalization. Besides, with support of FDIC, banks will compete for deposits and tend to self regulate better. The bank runs are disciplining them.
