•
Liquidity risk. •
Rate risk.
• Exchange risk. •
Credit risk.
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Why do banks have to be regulated?
Banking
(and financial) system stability is essential to the good functioning
of the economy (collective goods):
-The payment system must not undergo any failures.
-Banks private information on borrowers has to be preserved
to avoid a sudden drying up of economy credits.
Banking
crises are always costly in terms of GNP loss and budgetary
cost of banks recapitalisation (examples: the 1890 Baring crisis,
the 1907 American crisis, and more recently the banking crises
in Scandinavian countries 1992-1993, Russia in 1998, Argentina
in 2001).
Banking
crises are first of all illiquidity crises related to insight
deposits specificity and its monetary nature which is refunded
to peers in accordance with the line of march at the counter.
The crisis that initially affects a bank is contagious (negative
externality of networks) and it turns into a banking panic or
“counter racing”.
Historically,
the solution to this problem consisted in the intervention of
the central bank as a last resort lender (England, 1890 Baring
crisis). Later, (USA, in the 30s) deposit insurance systems
were established to consolidate depositors’ trust.
Banking
system regulation is equivalent to the implicit insurance provided
to the banking system. Otherwise, it might generate hazard morality
behaviours (excessive risk-taking) that the central bank constructive
ambiguity cannot thwart, in the cases of the biggest reputable
banks « Too Big To Fail ».
The
principle (from the 30s to the 80s), which has implied for a
long time the regulation of banking systems, was to avoid destructive
competition, inciting excessive risk-taking by:
- Limiting the access to the branch (condition granting to licences).
- Defining the range of activities allowed to banks.
- Establishing boundaries between various types of financial
intermediaries (banks, savings institutions, specialized deposits
organizations, insurance companies) and between finance and
industry.
- Restricting the role of interest rates in funds allowances
mechanisms (examples: deposit remuneration limits, interest
rates funded for certain credits)
- Imposing various good management ratios (compulsory reserves
ratios, own funds, transformation of date of payment).
Different
standards of regulation depending on the types of financial
intermediaries or on countries cause deformations of the competition
between those various financial intermediaries. Regulation imposes
an additional cost (regulatory taxes) on the production of stocks
and banking services.
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The competitive context of traditional banking activity.
In
industrialized countries, the weight of regulation has determined
a very particular context of banking activity exercises relying
on:
- A strong monopoly of banks in the funding of the economy (which
varies depending on the countries).
- A frail intensity of the competition within the banking system
and a quasi non-existence of foreign banks competition (national
banking spaces protected by exchange controls).
- Strategies essentially centered on the supply conditions and
on the production of banking services (including the integration
of production and distribution tasks; crucial role of branch
networks) and little worried about the evolutions of demand.
- Comfortable incomes essentially resulting from the line of
deposits and credits interest, relatively stable and of a widely
guaranteed standard.
- Allocative inefficiencies and most of all banks productive
inefficiencies are more and more obvious throughout the years
and are prejudicial to the efficiency of the entire economy.
From the 1930s to the early 1980s the banking systems of industrialized
countries, despite their seeming obvious differences (often
inherited from their History), were organised around some similar
strength lines, widely determined by the statutory frame. Among
them, the nature and the extent of the activities range offered
to banks and the trace of boundaries between banking activities,
funds markets and insurance markets; and the architecture of
the financial system and its joint with the real sphere of the
economy (households, firms, State).
