Capital Ideas - Summer 2013 - page 11

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Capital Ideas |
Summer 2013
9
T
he recent financial crises in Europe, Asia, and the
United States have revived interest in understand-
ing how disclosure regulations affect the stability and
development of banking systems. Supporters of public
disclosure argue it exerts discipline on banking insti-
tutions and gives them incentives to avoid risk. Op-
ponents fear it could trigger bank runs.
Because current banking regulation makes it dif-
ficult to separate the effects of disclosure from other
characteristics of banking systems,
João Granja,
a PhD
candidate at Booth, is using historical data from the
National Banking Era (the late 19th century through
to the creation of the Federal Reserve System in 1914)
to consider the issue. Granja concludes that reporting
requirements advanced the stability and development
of banking systems during that period—and could
resonate with what we see today.
Three different banking systems operated concur-
rently in the United States in the late 19th and early
20th centuries. There was some federal regulation,
but it only applied to banks that opted to be federally
regulated. State banks operated under charters granted
by state banking authorities, and some states adopted
reporting requirements more than half a century later
than others.
This patchwork of authority allows Granja to
compare the effects of the various regulations. For
...but in banking, disclosure
promotes stability
PhD RESEARCH: Accounting
his purposes, the federally regulated banks serve as
a benchmark for the effects of regulation, and he can
track the effect of regulations as they were rolled out in
individual states.
Granja notes that when bank regulation went into
effect, the rate of bank failures declined. Depositors
apparently developed more trust in the banks, and
increased their rate of long-term deposits relative to
short-term ones. The capital ratios of banks, which can
be thought of as the buffers that bankers offer to de-
positors against losses in the asset portfolio, fell after
the disclosure regulation, suggesting that depositors
needed less assurances to trust their money to com-
mercial banks.
Granja notes that disclosure regulation can be det-
rimental to financial stability, as imprecise data can
unduly exacerbate depositors’ fears and lead to bank
runs. Still, the fact that mandatory reporting require-
ments led to fewer bank failures indicates that disclo-
sure was a valuable tool during the National Banking
Era. Whether it applies to modern, complex financial
systems is another question.
Robin Mordfin
João Granja, “Disclosure Regulation in the Commercial Banking
Industry: Lessons from the National Banking Era,” PhD diss.,
University of Chicago Booth School of Business, 2013.
Image: Flickr/Jarapet
For an in-depth discussion of the benefits and
drawbacks of greater transparency in financial
On the web: Related content
at the Capital Ideas video channel
The Big Question: IS GREATER
TRANSPARENCY ALWAYS BETTER?
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