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This paper examines how public disclosure of banks’ risk exposure affects banks’ risk-taking incentives and assesses how the presence of informed depositors influences the soundness of the banking system. It finds that, when banks have complete control over the volatility of their loan portfolios, public disclosure reduces the probability of banking crises. However, when banks do not control their risk exposure, the presence of informed depositors may increase the probability of bank failures.
This paper examines how public disclosure of banks` risk exposure affects banks` risk-taking incentives and assesses how the presence of informed depositors influences the soundness of the banking system. It finds that, when banks have complete control over the volatility of their loan portfolios, public disclosure reduces the probability of banking crises. However, when banks do not control their risk exposure, the presence of informed depositors may increase the probability of bank failures.
The papers in this volume were prepared for the conference "Preventing Bank Crises: Lessons from Recent Global Bank Failures, " jointly organized by the Federal Reserve Bank of Chicago and the World Bank in June 1997, Chicago. Topics discussed include: a) government guarantees of bank liabilities; b) market discipline to supplement regulatory discipline; c) accuracy and truth in accounting and reporting to make private markets more efficient and enhance the responsiveness and accountability of bankers and regulators; d) transparency and disclosure of bank and regulatory agency activities; e) independence of bank regulators from political influence and greater accountability to the public; f) adequacy of privately provided capital to absorb bank losses and adverse exogenous shocks; g) privatization of publicly owned banks; h) foreign ownership of banks to augment domestic private capital and intensify competition; i) legal systems, particularly with respect to bankruptcy laws; and j) bank infrastructure, including the training of both bankers and bank regulators.
Even when lawsuits disclosed the chicanery, state and federal regulators misled the public. Despite the official denials, the public panicked. The ensuing runs caused the banking crash.
Relying on a broad array of records used together for the first time, Panic in the Loop reveals widespread fraud and insider abuse by bankers--and the complicity of corrupt politicians--that caused the Chicago banking debacle of 1932. It provides a fresh interpretation of the role played by bankers who turned the nation's financial crisis of the early 1930s into the decade-long Great Depression. It also calls for the abolition of secrecy that still permeates the bank regulatory system, which would have prevented the Enron fiasco and the financial meltdown of 2008. This book focuses on the recurrent failures of the financial system--the savings and loan crisis of the 1980s, the Enron debacle of the early 2000s, and finally the financial collapse of 2008. Because of regulatory secrecy, knowing what happened in Chicago in 1932 is critical to understanding the glaring problems in the regulation of American finance, in particular the lack of transparency, the abuse of financial institutions by insiders, and the capture of public institutions by insiders going through the revolving door between the private and public sectors. Eight decades later little has changed. The regulatory failures of the 1930s--especially the pervasive system of secrecy that allowed the fraud and insider abuse to flourish--were repeated during the collapse of 2008. Transparency would strike at the alliance between the executives of financial institutions and public officials, who caused the worst economic upheaval since the Great Depression.
This manual addresses problem bank resolution from the time a bank is identified as being in financial trouble through intervention to liquidation. It comes with an interactive CD-ROM from which users can download and tailor documents to use in their own closing processes. The book draws on the author's lengthy career as a bank liquidator for the Federal Deposit Insurance Corporation and Resolution Trust Corporation and his worldwide consulting experience with the International Monetary Fund and other international organizations. The chapters examine legal frameworks; the function of deposit insurance during bank failures; the importance of public and media relations; measures and procedures used by a supervisory authority to rehabilitate, restructure, or resolve a problem bank; bank intervention procedures; conservatorship operations; bank resolution alternatives and methods for marketing a problem bank using a purchase and assumption agreement; operations and administrative procedures for bank liquidation or receivership; and asset management and disposition.