"To Establish a More Effective Supervision of Banking": How the Birth of the Fed Altered Bank Supervision

56 Pages Posted: 28 Feb 2011 Last revised: 23 Jun 2021

See all articles by Eugene N. White

Eugene N. White

Rutgers, The State University of New Jersey

Date Written: February 2011

Abstract

Although bank supervision under the National Banking System exercised a light hand and panics were frequent, depositor losses were minimal. Double liability induced shareholders to carefully monitor bank managers and voluntarily liquidate banks early if they appeared to be in trouble. Inducing more disclosure, marking assets to market, and ensuring prompt closure of insolvent national banks, the Comptroller of the Currency reinforced market discipline. The arrival of the Federal Reserve weakened this regime. Monetary policy decisions conflicted with the goal of financial stability and created moral hazard. The appearance of the Fed as an additional supervisor led to more "competition in laxity" among regulators and "regulatory arbitrage" by banks. When the Great Depression hit, policy-induced deflation and asset price volatility were misdiagnosed as failures of competition and market valuation. In response, the New Deal shifted to a regime of discretion-based supervision with forbearance.

Suggested Citation

White, Eugene N., "To Establish a More Effective Supervision of Banking": How the Birth of the Fed Altered Bank Supervision (February 2011). NBER Working Paper No. w16825, Available at SSRN: https://ssrn.com/abstract=1770379

Eugene N. White (Contact Author)

Rutgers, The State University of New Jersey ( email )

311 North 5th Street
New Brunswick, NJ 08854
United States

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