Tuesday, March 31, 2015

Bank runs prior to the Fed

Courtesy of the Fed:

-The total losses borne by depositors in closed banks from 1865 through 1933 were at an annual rate of .21 percent of total deposits.
-Before the Great Depression, the general trend of these loss rates was downward.
-The loss rates were .19 percent in 1865-80, .12 percent in 1881-1900, .04 percent in 1901-20, and rose to a peak of .34 percent in 1921-33.
-Depositors’ losses on total deposits exceed .25 percent in 12 years: 1873, 1875-78, 1884, 1891, 1893 and 1930-33.
-The average loss rate in these 12 years is .78 percent of total deposits.

Not even a 1% loss in deposits prior to the creation of the Fed.

Back in 2008, people were howling that the end of the world is coming if we do not bail out those big banks.

Banks have been failing for as long as they have existed. It's not the end of the world if a bank fails. It is a healthy process. Prudent banks should be allowed to buy up the assets of the failed banks and gain market shares. Instead, what we've seen in 2008 was the bailout of failed banks and the punishment of prudent and sound banks. There were more than 7000 banks in the US prior to the crisis. It is no big deal to let a few of them fail.

People always tell me that more regulation is needed. But the banking industry is one of the most, if not the most, regulated industries. Piling on more regulations will just push the problems away to another area. The problems will resurface again, no doubt about that. The root problem was government guarantees and the back-door provided by the Fed. These had encouraged banks to take excessive risks. Trying to control this with more regulations is the classic case of "two wrongs don't make a right"! The best regulation is market regulation. If you mismanage your bank, you fail. Period. In the market, banks should be treated like any commercial enterprise. Greed has to be balanced with greed. Instead, they have special privileges. They do not have as much fear as other commercial entities.

Those bailed-out banks are bigger and more leveraged today. Collectively, they hold more than $2 trillion of US government debt. In the Fed's stress test of the banks, they did not consider a scenario whereby bond prices have a meaningful drop in prices. Is it any wonder that the banks passed the test?

No comments:

Post a Comment

Web Statistics