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Measuring Bank Regulation and Supervision: Lessons from Economic History. Stephen Haber Stanford University Presented at the World Bank, October 26, 2007. What is Agreed Upon:.
Presented at the World Bank, October 26, 2007
There is a causal relationship between financial development and economic growth: King and Levine 1993; Levine 1997, 1998, 2005; Levine and Zervos 1998; Levine, Loayza, and Beck 2000; Rajan and Zingales 1998;Gerschenkron 1962; Rousseau and Sylla 2003.
How do we encourage financial development?.
1. Stronger supervision and regulation?
2. Reforms to basic institutions?
Might #1, in the absence of #2, actually make things worse?
One method is to use history as a natural laboratory, to see if the hypothesized causal relationships can be seen to operate in real world cases.
I am therefore going to focus on a single case—but that that has had five separate experiments in the creation of a banking system: Mexico, 1880-2007.
Getting bankers to deploy their capital meant
A. centralizing supervision
B. granting special privileges
C. Limiting entry.
A. segmented monopolies.
B. rent sharing with politicians.
Percent of non-government loans made to banks’ own boards of directors:
Banamex 1886 to 1901 100%
Mercantil de Veracruz 1898-1906 86%
Coahuila, 1908 72%
Durango, 1908 51%
Mercantil de Monterrey, 1908 31%
Nuevo León, 1908 29%
Getting bankers to deploy their capital meant:
A. Allowing them to write the banking laws
B. Limiting entry.
C. Giving them voice in the supervisory body—the CNB.
D. Creating a government owned commercial bank, Banxico, that made loans to the private banks and to powerful politicians.
In 1932 Banxico was made a central bank.
In 1936 the government required that private banks hold deposit reserves in Banxico, and bank supervision was transferred to Banxico.
In the 1970s, the government used the supervisory powers of Banxico to expropriate deposits, and then the government expropriated the banks in 1982
A. Accounting standards rewritten.
B. Related lending made more difficult.
C. Deposit insurance agency made independent.
D. Foreign banks permitted to buy Mexican banks.
A. Bankruptcy laws reformed;
B. Programs to improve property registers.
C. Expansion of non-bank banking sector.
A. Bank charters granted to large retailers.
Time constraints prevent us from discussing other cases.
Nevertheless, the analysis of other cases—Brazil, Colombia, the United States—produces broadly similar results
Supervision can be used opportunistically by governments against private banks—and the more unconstrained the government is, the more opportunistic it can be.