Cause Of Bank Failures

The Stock Market Crash

The Stock Market Crash in October of 1929 is often cited as the beginning of the Great Depression, but did it actually cause it? The answer is no. First, the stock price for a particular company merely reflects current information about the future income stream of that company. Thus, it is a change in available information that changes the stock price. When the Fed began to raise interest rates in early 1929, this began the tumble.

However, a stock market crash could cause people to increase their liquidity preference which might lead them to hoard money.

In the August 1990 issue of The Quarterly Journal of Economics, Christine D. Romer writes that "the negative effect of stock market variability is more than strong enough to account for the entire decline in real consumer spending on durables that occurred in late 1929 and 1930."

Hoarding Money

People hoard money because they have a liquidity preference. I.e., people want to have their assets in a readily convertible form, such as money. There are several misconceptions about hoarding money. First hoarding is not the same thing as saving. If I put my money into a savings account, that money is lent out to someone else who then spends it. Second, hoarding, by itself, cannot cause a recession or depression. As long as prices and wages drop instantly to reflect the lower amount of money in the economy, then hoarding causes no problems. Indeed, hoarding can even be seen as beneficial to those who don't hoard, since their money will be able to buy more goods as a result of the lower prices.

If a country has a gold standard, then hoarding money can make the money supply drop dramatically since a gold standard makes the quantity of money difficult for the government to control.

Thomas Sowell: Federal Reserve a 'Cancer'

In Depth April 17, 2008, 5:00PM EST

How New Global Banking Rules Could Deepen the U.S. Crisis

by Peter Coy

James Victore

In 1999, in the aftermath of a financial crisis that spread from East Asia to Brazil, Russia, and beyond, the central bankers and finance ministers of 10 of the world's wealthiest nations sent their deputies to the tidy Swiss city of Basel. Their mission: to begin devising a set of improved banking regulations for their governments to adopt, with the hope of reducing the harm from future financial crises. The world's leading financial regulators labored together to strike a balance between ensuring banks' safety and giving them room to take risks and make money, finally in 2004 producing a recommended rulebook called Basel II. (Yes, there was a Basel I. More on that later.)

Now, as another financial crisis unfolds, it would seem that nations are adopting BaselII at just the right time. Europe and Japan have put it into practice over the past year, and the U.S. is set to phase in a modified version starting next year. The start date for American banks to begin submitting their plans for compliance to U.S. regulators was Apr. 1.

For the rest of the article please visit:
http://www.businessweek.com/magazine/content/08_17/b4081083014665.htm

In-Depth Look: Will Regulations Hurt Bank Profits?

In Focus: Regulating Risk; Outlook For Banks And Regulating Risk Specula...

Swiss Finish’ Sets New Standard for Global Bank Regulation

INCIDENT: The traditional Swiss finishing school taught young women etiquette and social graces, but international bank regulators are talking about something much tougher when they refer to a "Swiss finish" for global banks.
Just how tough became clear last week, 4 October, when a Swiss commission proposed that its two giant banks, UBS and Credit Suisse, be subjected to capital requirements of up to 19%, nearly three times as tough as the 7% capital-to-assets ratio recently suggested by the Basel Banking Committee as a minimum global standard.

SIGNIFICANCE: The ambitious Swiss plan, designed to solve the "too big to fail" problem, will set the standard for megabank regulation as Group of 20 heads prepare for their summit in November. It almost certainly means that other big global banks such as JP Morgan Chase and Deutsche Bank will face capital surcharges from their national regulators.

Swiss National Bank President Philipp Hildebrand left no doubt in an op-ed last week that the Financial Stability Board, mandated by the G-20 to ready proposals on financial regulation, would push for the higher standards for big banks.

"Two years after the demise of Lehman Brothers, the ‘too big to fail' problem remains unresolved," Hildebrand wrote in the Financial Times. "The Financial Stability Board (FSB) and its members are committed to proposing measures to the Group of 20 leaders to address the problem."

To read more, please visit: http://inteldaily.com/2010/10/swiss-finish-sets-new-standard-for-global-bank-regulation/

Bank Failures

Bank Regulation Case Pits U.S. Against States

WASHINGTON — The Supreme Court heard arguments on Tuesday in a case that could change the way big banks are regulated.

In the case, Cuomo v. the Clearing House Association, federal and state regulators have squared off over which part of the government should serve as the nation’s watchdog for national banks. The case began four years ago, when Eliot Spitzer, New York’s attorney general at the time, questioned why some national banks seemed to be making a disproportionate number of high-interest home mortgage loans to black and Hispanic borrowers.

The fight involves fundamental issues of federalism and consumer protection, and, should the court decide for Mr. Cuomo’s position, could open new powers of regulation to the states.

Mr. Spitzer was trying to enforce New York’s antidiscrimination laws, but he ran up against federal precedent that tended to leave regulation of national banks to the Treasury Department, and, specifically, the Office of the Comptroller of the Currency. A consortium of banks sued Mr. Spitzer, and so did the Office of the Comptroller of the Currency.

For the rest of this article, please visit:

http://www.nytimes.com/2009/04/29/business/29bizcourt.html