The subject of government bank regulation is intimately intertwined with that of government deposit insurance. If the government is to insure bank deposits, it should also have some say in the risks that insured banks are allowed to take, otherwise it would leave itself wide open to unlimited potential losses. John H. Kareken (in this issue) comes close to arguing that banks without government ...

We analyze a banking system in which the class of feasible deposit contracts, or mechanisms, is broad. The mechanisms must satisfy a sequential service constraint, but partial or full suspension of convertibility is allowed. Consumers must be willing to deposit, ex ante. We show, by examples, that under the socalled “optimal contract,” the post-deposit game can have a run equilibrium. Given a p...

I study the role of deposit accounts in bank-firm lending relationships, using a dataset with detailed information about all Norwegian firms’ bank deposit and loan account balances. I show that firms are more likely to increase borrowing from a bank where they hold deposit accounts, and less likely to end the lending relationship. In regressions with both firm and bank fixed effects, I find tha...

The author develops the first comparative empirical study of bank failures during the nineties between East Asia and Latin America using bank-level data, in order to address the following two questions: (i) To what extent did individual bank conditions explain bank failures? (ii) Did mainly the weakest banks, in terms of their fundamentals, fail in the crisis countries? The main results for Eas...

This paper examines the association between government ownership and bank stability over 1997-2010 across a sample of 103 countries. With a continuous variable to proxy for government ownership, our system GMM estimates indicate that the association between government ownership and bank stability depends on a country’s economic development and regulatory quality. In developed, high income count...

There is strong evidence that the interest rates charged by banks on the flow of newly extended Commercial & Industrial (C&I) loans predict future loan performance and CAMEL rating downgrades by bank supervisors. While internal risk ratings have little explanatory power for future loan performance, they do help predict future CAMEL downgrades. These findings suggest that supervisors might consi...

The principal driving force in the development of the financial system of pre-industrial Europe was not lending per se, but payments. Trade among strangers required the development of methods of payment that did not require mutual acquaintance and trust. The two principal financial innovations of pre-industrial Europe—the deposit bank and the bill of exchange—evolved to address this need. Lendi...

Bank crises, by interrupting liquidity provision, have been viewed as resulting in welfare losses. In a model of banking with moral hazard, we show that second best bank contracts that improve on autarky ex ante require costly crises to occur with positive probability at the interim stage. When bank payoffs are partially appropriable, either directly via imposition of fines or indirectly by the...

With bank-level data from 81 developing countries, the paper shows that increased foreign bank presence is associated with increased reliance on non-deposit based funding, which leads to higher interest rate spreads, less credit to the private sector, and higher volatility in bank loans. Foreign bank entry significantly reduces domestic banks’ share of deposits while foreign banks typically all...