Forbearance Policy Research Articles

La France a-t-elle connu des paniques bancaires inefficientes ?

Bien que les économistes et les historiens reconnaissent l’existence de ruées bancaires localisées en France dans les années 1930, ils considèrent généralement que ce phénomène n’a pas la même gravité que dans d’autres pays et que les fermetures de banques contribuent plutôt à la consolidation et à l’assainissement du système bancaire. Un réexamen de travaux historiques récents (H. Bonin, M. Lescure, en particulier) montre au contraire qu’en trois circonstances, toutes les composantes de véritables paniques généralisées et contagieuses sont réunies. Près de 40% des banques sont amenées à cesser leur activité. Si une seule grande banque, la BNC, fait faillite, les défaillances frappent un nombre important de banques bien capitalisées et solvables: les paniques sont donc inefficientes. Les sauvetages mis en œuvre par le Trésor, avec la participation timide de la Banque de France empêtrée dans ses conflits d’intérêts, sont inefficaces car ils s’adressent à des banques prétendument trop importantes pour faire faillite mais qui doivent être reprises. L’indulgence, en revanche, est refusée à plusieurs centaines d’autres banques moyennes qui jouent pourtant un rôle majeur dans l’organisation du marché du crédit et qui contribuent au refinancement en liquidité nécessaire aux banques grâce à leur maîtrise des reports en bourse. Leur disparition porte gravement atteinte au fonctionnement de l’intermédiation financière pour plusieurs décennies.

Forbearance Impedes Confidence Recovery

The stylized fact for economies experiencing financial crises, that slow economic reform is followed by persistent stagnation, is usually explained as follows: Forbearance policy (i.e., an implicit subsidy to inefficient sectors) distorts resource allocation and causes a supply shortage of resources to the productive sectors. Since the Japanese economy has stagnated for over a decade even though Japan has had sufficient resources to allocate to productive sectors, I propose another explanation: Forbearance impedes the recovery of confidence that is lost during a financial crisis. If confidence is restored through Bayesian learning by economic agents based on observations of government actions, then the inaction of the government (forbearance) impedes Bayesian learning. Since it seems plausible to assume that economic agents face Knightian uncertainty (i.e., a non-unique prior) after a financial crisis, I use the framework of uncertainty aversion developed by Gilboa and Schmeidler (1989). The Bayesian update rule for a non-unique prior is proposed and used for the analysis of confidence building. The model shows that the forbearance policy hinders the convergence of a non-unique prior and delays the economic recovery.

Bank charter values and capital levels: An international comparison

Although recent regulatory policies, such as the Basle capital requirements, purport to level the international financial playing field, country-specific effects may still endure. These country-specific factors may stem from regulatory policies (such as deposit insurance, access to discount window borrowings, too big to fail and forbearance policies, lender of last resort privileges), or may be the result of market forces (such as monopoly power, cost synergies, information impediments to development of domestic financial markets). In this paper, we utilized a market-based valuation measure, Tobin's Q, to determine whether bank charter values include a country-specific component. Although we found the existence of country-specific components in Spain, Japan, and the United States, their significance declined over the period 1991–1993. We examined whether country-specific factors have an impact on bank capital levels. We isolated two opposing effects: the “moral hazard effect” (implying a negative relationship between charter values and capital levels) and the “market rents effect” (implying a positive relationship between bank charter values and capital levels). We found that the market rents effect dominates for banks in countries with insignificant levels of country-specific components in their charter values, while the moral hazard effect dominates in countries where the country-specific factor is strong. This is consistent with risk enhancing (i.e., capital reducing) bank behavior in countries with subsidized governmental safety nets which enhance bank charter values.

Mexican banks and the 1994 peso crisis: The importance of initial conditions

We find that portfolio investment flows explain a large proportion of the variance in Mexico's reserve position, exchange rate and macroeconomic performance, while the impact of direct investment is relatively small. Moreover, we argue that the huge portfolio investment outflows associated with the 1994 peso crisis reflected a long sequence of related events, beginning with key features of the bank privatization program that helped institute a policy of government forbearance toward the Mexican banks. As such, the crisis points to the importance of minimizing the distortions associated with the failure to address emerging financial difficulties at institutions with access to government safety nets.

Forbearance, deposit insurance pricing, and incentive compatible bank regulation

This paper examines the incentive compatible role of regulatory forbearance policy in the context of optimal bank regulation under moral hazard. We show that, when a bank's asset portfolio returns have market risk, the regulator can influence the bank's choice of ex ante risk by delaying the closure of an insolvent bank. The optimal closure policy involves co-ordinating the closure decision with market-wide performance. Such a policy may significantly alleviate the bank's ex ante risk-shifting problem. Furthermore, even fixed-rate deposit insurance can be optimal when combined with a sound forbearance policy and a minimum capital standard.

The consequences of a policy of necessity: Bank regulatory forbearance, 1986–1989

While it is widely recognized that bank regulators choose the policy of forbearance because of an undercapitalized bank insurance fund, a key policy question centers on what were the effects of forbearance. This study uses a survival model to track capital deficient banks from December 1986 to December 1989, a period in which regulators explicitly used forbearance in managing troubled banks. Despite the contention that forbearance returns banks to safe-and-sound practices, this study concludes that forbearance did not enable troubled banks to return to viability. Furthermore, the evidence from the survival analysis provides negligible support, if any, for the interrelationship between forbearance and too-big-to-fail doctrine.

The Reform of Federal Deposit Insurance

In the first essay, Calomiris argues that the most desirable means by which to achieve banking system stability is to permit unlimited branch banking combined with the type of privately administered formal deposit insurance programs of antebellum Indiana, Ohio, and Iowa. In the second essay, Barth and Bartholomew argue convincingly that the major culprit in the S&L crisis is the existing structure of the federal deposit insurance system. They take the view that the Financial Institutions Reform, Recovery and Enforcement Act was seriously flawed for its failure to adequately restructure the federal deposit insurance system. Brumbaugh and Litan express the view that due to the widespread use of accounting onventions to conceal balance sheet weaknesses, the number and assets of market-value insolvent banks cannot be known with any certainty. Kane argues that government deposit insurers have hidden or unacknowledged objectives and that these objectives conflict with the presumed long term goals of protecting depositors of modest means and preventing runs in a cost-effective manner. Romer and Weingast demonstrate how politicians benefited by keeping taxpayers uniformed about the thrift crisis and by establishing and enforcing a policy of forbearance. Chirinko and Guill quantitatively examine how macroeconomic shocks affect depository institutions. They argue that major problems can be encountered unless approaches to deposit-insurance reform and regulatory reform explicitly and carefully consider the impacts of such macroeconomic shocks on these institutions. Kaufman observes that, since 1974, the Federal Reserve has provided lender of last resort (LLR) assistance to prolong the life insolvent banks deemed too large to fail (TLTF). He argues that the LLR assistance in recent years has not saved most banks but has provided uninsured depositors time to flee without losses. It has frequently been argues that accounting techniques have played a significant part in the interaction of depository institutions and federal deposit insurance regulation. The last two papers in this book focus on the attributes of market-value accounting.

Das Reichskommissariat für die Behandlung feindlichen Vermögens im Zweiten Weltkrieg: Eine Studie zur Verwaltungs-, Rechts- und Wirtschaftsgeschichte des nationalsozialistischen Deutschlands. By Stephan H. Lindner · Stuttgart: Franz Steiner Verlag, 1991. 178 pp. Tables, notes, and bibliography. DM 58. ISBN 3-515-051971-1.

This is a brief study of the interministerial and interagency struggles that surrounded the administration of enemy assets in Nazi Germany. The Reichskommissariat fur die Behandlung feindlichen Verm6gens, which was a creation of the German Foreign Office, operated in a manner similar to its equivalent, the American Alien Property Custodian, at least as regards assets either located within the borders of the Reich or not owned by Jews or other Eastern-peoples in occupied Europe. With these exceptions, foreign properties came under a benevolent form of trusteeship that kept enterprises intact. Such a benign policy made good sense, according to Stephan Lindner, and therefore it was hard to dislodge. Foreign-owned factories contributed to the war effort to the same extent as others. Profits could not be repatriated owing to currency controls. A hard line would have invited retaliation not only in enemy nations but in many neutral countries, which, though subject to U.S.-British pressures, had maintained trade links to the Continent. In the event of a compromise peace, finally, a policy of forbearance and moderation might have protected the Reich from seizures like those following the First World War. Most of Lindner's account describes successive challenges to Reichskommissariat policy mounted by self-seeking Nazi economic factions like the Goring complex. The reader might have gained a fuller appreciation of what was at stake in these contests if, instead of recounting such essentially repetitious episodes, the author had compared specific instances of factory administration by each of the two sides in the struggle. Nevertheless, this dispassionate analysis is a welcome addition to a literature that helps explain why, except for victims of Nazi racism, business as usual was the usual business response in the Third Reich.

Postgraduate podiatric medical educational resources in the Department of Veterans Affairs.

The existing podiatric medical residencies in the Department of Veterans Affairs are reviewed. The suitability of these residencies to fill a potential need for entry level programs is discussed. The financial implications of providing such training are reviewed and a plan for implementation is presented. Ninety-eight rotating podiatric residency positions currently available in Department of Veterans Affairs hospitals are prime candidates to serve as entry level PGY-1 positions. Assurances will need to be given that implementation of the PGY-1 concept must serve the best interests of the veteran patient population, and that funds will need to be allocated to pay faculty salaries and resident stipends. Congressional review of student loan forbearance policies affecting podiatric medical residents is also needed.