The Oxford Handbook of Banking

1020 Pages·2016·8.13 MB·English

by  Berger Allen N.

the oxford handbook of
BANKING
the oxford handbook of
.......................................................................................................................................................................
B A N K I N G
.......................................................................................................................................................................
Edited by
ALLEN N. BERGER
PHILIP MOLYNEUX
and
JOHN O. S. WILSON
1
3
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ISBN 978–0–19–923661–9
1 3 5 7 9 10 8 6 4 2
For Mindy
(Allen N. Berger)
For Delyth, Alun, Gareth, Gethin,
Catrin, Lois, and Rhiannon
(Philip Molyneux)
For Alison, Kathryn, Elizabeth, and Jean
(John O. S. Wilson)
reface
P
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Whenwecommencedthisprojectatthestartof2007,banksaroundtheworldwere
postingrecordproWtsandmajorrisksappearedtohaveabated.Thegeneralmacro-
economic environment embodied in rising stock markets and buoyant economic
growthprovidedthebedrockforthestrongperformanceweobservedatthattime.
Since then things have changed completely! During the Wrst half of 2007,
followingincreasesininterestrates,therateofUSsubprimemortgagedelinquen-
cies increased, prices of mortgage-backed securities were reduced, and the cost of
insuring these securities against default increased. The turmoil that then hit the
global Wnancial system has been unprecedented. There have been widespread
government bank bailouts, recapitalization plans, liquidity injections, and credit
guarantee schemes aVecting many countries. The cost of all this activity has been
enormous. InApril 2009, theIMF statedthat USWnancialinstitutions werelikely
to incur $2.7 trillion of losses from the global crisis, part of a worldwide total
expectedtotop$4trillion.Globalbankingsectorinstabilityandgridlockinmany
other Wnancial markets have raised profound concerns about the stability of the
Wnancialsystem andthebusiness modelsused bybankswithinthe system.
Aswecompletedthehandbookinearly2009,bankingsystemsinmanycountries
(particularly in the US, UK, Germany, Spain, Ireland, Iceland, and throughout
central and eastern Europe) remained in a state of crisis, threatening capacity to
perform eVective intermediation functions for many years to come. Government
intervention in banking continues via the purchases of impaired assets, recapita-
lizationsoftroubledbanks,andinjectionsofliquidity intothesystem.Academics
andpolicymakerscontinuetodebateproposalstoWxtheWnancialsystem.Reforms
thathavebeenorarelikelytobeadoptedinthecomingmonthsinclude:extending
thecoverageofbankregulation;increasingcapitalrequirements;designingcounter-
cyclicalcapitalrequirements;enhancingregulationandsupervisionofbankliquid-
ity; enhanced supervision of credit rating agencies; codes covering executive pay
and beneWts; improving arrangements for regulation of the activities of cross-
border banks; and a shift in focus from micro- to macro-prudential supervision.
IflessonsarelearnedfromtheongoingWnancialcrisis,thereislittledoubtthatthe
bankingindustrywhichemergesintheyearstocomewillbeverydiVerentfromthe
onewe observedatthe beginningof 2007.
Thishandbookprovidesthereaderwithacomprehensiveoverviewandanalysis
of banking. The authors of the following 36 chapters comprise a collection of
viii preface
leading academics and policymakers in the Weld. These authors emanate from
universitiesintheUnitedStates,Europe,SouthAmerica,andAsia;theUSFederal
Reserve System; the OYce of the Comptroller of Currency; the European Central
Bank; the Bank of Thailand; the World Bank; the International Monetary Fund;
and the World Trade Organization. The book strikes a balance among abstract
theory, empirical research, practitioner analysis, and policy-related material.
DiVerent chapters in the handbook have diVerent emphases on these four ingre-
dients.Wehopethatthecontributionscontainedinthishandbooksetthestagefor
futureresearch andpolicydebatefor manyyears tocome.
cknowledgments
A
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Firstly,andmostimportantlywewishtothankthecontributorstothehandbook.
We are delighted to have brought together such an outstanding set of research
experts from academic and policy arenas across Europe, North America, South
America, and Asia. These experts have shown a high level of commitment and
perseverance to the project from beginning to end. Without their expertise,
dedication, andeYciency inproducingscholarlybankingchaptersthishandbook
would never havebeen possible.
The production of this handbook has also relied heavily on the exceptional
enthusiasmandcommitmentofOxfordUniversityPress,mostnotablySarahCaro,
publisherforEconomicsandFinancewhowascrucialinhelpinguskick-startthe
project. Oxford University Press delegates and a number of anonymous referees
alsoplayedanimportantroleinadvisingontheshapeofthehandbookatitsearly
stages.WewouldalsoliketoacknowledgethehelpandadviceofAimeeWrightand
Jen Wilkinson, Assistant Commissioning Editors who worked closely with us
throughout the entire production process. Harriet Ayles, Emma Hawes, Lianne
Slavin,andLucyGostwickalsoplayedacrucialroletowardtheendoftheproject.
Our proofreader, Michael Janes, also provided invaluable service toward the Wnal
stages oftheproject.
We would also like to acknowledge the support of our home institutions: the
MooreSchool ofBusiness at Universityof SouthCarolina; the Business School at
Bangor University;andthe ManagementSchoolatUniversityof StAndrews.
Anumberofindividualsprovidedcommentstousonthecontentandstyleon
parts of the handbook, including Barbara Casu, Mark Flannery, Claudia Girar-
done,JohnGoddard,DickHerring,EdKane,DonalMcKillop,JoePeek,andLarry
White. Abig thankyougoestothem.
Finally,wewouldliketothankourfamiliesandfriendsfortheirencouragement
and patience over the last three years while completing this handbook. Their
support is muchappreciated.
ontents
C
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List of Figures xv
List of Tables xviii
List of Abbreviations xxi
List of Contributors xxvii
1. Banking: An Overview 1
Allen N. Berger, Philip Molyneux, and John O. S. Wilson
I. THE THEORY OF BANKING
2. The Roles of Banks in Financial Systems 37
FranklinAllen and Elena Carletti
3. The Accelerating Integration of Banks and Markets and its
Implications for Regulation 58
ArnoudW. A. Boot and AnjanV. Thakor
4. Risk Management in Banking 90
Linda Allen and Anthony Saunders
5. Liquidity Production in Twenty-Wrst-century Banking 112
Philip E. Strahan
6. DiversiWcation in Banking 146
Kevin J. Stiroh
7. Universal Banking 171
Alan D. Morrison
8. The Corporate Structure of International Financial
Conglomerates: Complexity and its Implications for
Safety and Soundness 195
Richard Herring and Jacopo Carmassi
xii contents
II. REGULATORY AND POLICY PERSPECTIVES
9. Central Banking 233
Michel Aglietta and Benoit Mojon
10. The Role of Banks in the Transmission of Monetary Policy 257
Joe Peek and Eric S. Rosengren
11. Lender of Last Resort and Bank Closure Policy 278
Xavier Freixas and Bruno M. Parigi
12. Regulation and Supervision: An Ethical Perspective 315
Edward J. Kane
13. Deposit Insurance 339
Robert A. Eisenbeis and George G. Kaufman
14. Risk-based Regulatory Capital and Basel II 357
Michael B. Gordy and Erik A. Heitfield
15. Market Discipline in Bank Supervision 377
Mark J. Flannery
16. Competition and Antitrust Policy in Banking 405
Astrid A. Dick and Timothy H. Hannan
17. World Trade Organization Commitments vs. Reported
Practices on Foreign Bank Entry and Regulation: A
Cross-country Analysis 430
James R. Barth, Juan A. Marchetti, Daniel E. Nolle,
and Wanvimol Sawangngoenyuang
III. BANK PERFORMANCE
18. EYciency in Banking: Theory, Practice, and Evidence 463
Joseph P. Hughes and Loretta J. Mester
19. Technological Change, Financial Innovation, and DiVusion
in Banking 486
W. Scott Frame and Lawrence J. White
20. Banking Globalization: International Consolidation and
Mergers in Banking 508
Claudia M. Buch and Gayle L. DeLong