Speaker: Ben Chabot
Title: The Cost and Benefits of Bank Capital in a World Without Too Big to Fail
Abstract: Modern bank capital regulation seeks to balance the tradeoffs between the costs of increased capital and the benefits of financial stability. Confounding this analysis is the question of how costly bank capital would be, and how banks would behave, in the absence of implicit government guarantees. We look to an historical period where banks and their creditors did not expect even large, systemically important banks to be bailed out. During the pre-Fed National Banking Era, bank creditors did not enjoy implicit or explicit government insurance, and bank rationally expected to fail should they be unable to meet their obligations. Furthermore, the bank regulation at the time focused on liquidity and allowed banks considerable leeway in selecting their capital ratios.
Stock returns and balance sheet data from this era provide us with a natural laboratory to examine the tradeoffs between bank capital, systemic risk, and liquidity production.
Maggie Hendrix
(847) 467-7263
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