Banking deregulation in Europe
Baltensperger, Ernst ; Dermine, Jean
In: Economic Policy, 1987, vol. 2, no. 4, p. 63-95
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- Banking deregulation Ernst Baltensperger and Jean Dermine Deregulation of financial services is well under way in many European countries. This has led to fears that economies are now more vulnerable to macroeconomic shocks. The authors focus on one aspect of financial deregulation, namely liberalization of the banking system. They show that measures such as the abolition of reserve requirements increase macroeconomic variability under some circumstances but reduce it under others. No general macroeconomic case can be made for banking regulation or for its liberalization. Analysis of microeconomic issues is more fruitful. Asymmetric information and the risks of contagion in a panic can lead to runs against the banking system. To the extent that these are socially inefficient, public intervention may be justified. This presumption is stronger since the risks of bank runs have grown recently with the increased maturity mismatch - the finance of illiquid loans by liquid short-term deposits. To meet this danger, the authors recommend regulation of deposit contracts whilst preserving incentives for bank monitoring by private parties. Specifically, they propose an ex post liability of current and former depositors when banks default, thereby offsetting the incentive to withdraw funds at the onset of a crisis. Being quick off the mark would no longer be sufficient, and sophisticated depositors would press for greater disclosure and fuller monitoring of bank activities. The authors also recommend that remaining controls on deposit interest rates should be scrapped and that supervision of international banking should be cooperatively conducted by host and parent authorities