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Reform of Financial Institutions
Published online by Cambridge University Press: 19 October 2009
Extract
Recently, there has been no shortage of proposals for reforming the U.S. financial system. Proposals have been offered by the Hunt Commission, the Administration, and several other groups. All these proposals contain many common elements, attesting to the difficulty of obtaining comprehensive financial reform. The analysis here focuses primarily upon the Administration's 1973 recommendations.
- Type
- Reform of Financial Institutions and Markets: A Progress Evaluation
- Information
- Copyright
- Copyright © School of Business Administration, University of Washington 1974
References
1 Report of the President's Commission on Financial Structure and Regulation (Washington, 1972).
2 Recommendations for Change in the U.S. Financial System (Washington: Department of the Treasury, August 3, 1973); and “Financial Institutions Act of 1973,” legislation proposed by the Secretary of the Treasury (October 11, 1973).
3 Commission on Money and Credit, Money and Credit (Englewood Cliffs, N.J.: Prentice Hall, Inc., 1961)Google Scholar. Report of the Committee on Financial Institutions (an Administration Group, 1963). Financial Institutions: Reform and the Public Interest (Staff Report of the Subcommittee on Domestic Finance, Committee on Banking and Currency, House of Pepresentatives, 93rd Congress, First Session, August 1973).
4 See, for instance, Brooke, Phillip, “Bank Technology Edge Frustrates Thrifts,” American Banker (November 13, 1972).Google Scholar
5 For a more complete analysis of this problem, see Gibson, William E., “‘Hot Money’ and the Viability of Thrift Institutions,” Brookings Papers on Economic Activity, 1974(3).CrossRefGoogle Scholar
6 See Ibid.
7 One would expect mortgage borrowing would decline when market rates rose, but it appears that thrifts' lending has been limited by an absence of funds. See Gibson, William E., “Protecting Homebuilding from Restrictive Credit Conditions,” Brookings Papers on Economic Activity (1973.3).Google Scholar
8 This is, of course, a problem closely related to the viability of thrifts, as these provide over 60 percent of residential financing in normal years. It is listed separately because the stabilization of mortgage flows can take forms other than strengthening thrift institutions (although this possibility should receive serious consideration). In particular, flows might also be stabilized by drawing other lender's further into the mortgage market.
9 Unless, of course, there is a simultaneous shift in demands away from savings deposits and mortgages on the part of consumers.
10 Economic Report of the President (1970), p. 104.
11 It seems difficult to imagine that in competitive markets consumer loans by themselves (without information economies) would yield substantially more after default and administration costs than mortgage loans. My reading of the latest functional cost data supports this conjecture. See Federal Reserve Functional Cost Analysis; 1971 Average Banks, and Gibson, William E., “Improving the U.S. Financial System,” in Bank Structure and Competition (Chicago: Federal Reserve Bank of Chicago, 1974), pp. 11–12.Google Scholar
12 One would not, of course, expect mortgage lending to be constant as interest rates fluctuate, since increases in rates dissuade many potential house buyers, and mortgage growth is slowed from the demand side.
13 Actually, the spirit of this question is in the wrong direction from the stand-point of improving the financial system. It is raised because it is on so many people's minds, including Congressmen's.
14 I judge it to be not much of an exaggeration to say that the trend in federal housing legislation in recent years implies that we have never been even close to “enough.” I find the evidence presented by Allan Meltzer sufficiently impressive to at least question whether our mortgage programs are having their desired effects. See Meltzer, Allan H., “Housing and Financing” (Study prepared for the National Association of House Builders, Washington, D.C., November 19, 1972).Google Scholar
15 See “Financial Reform and Housing: A Summary Statement” and “Effects on Mortgage Markets and Housing,” in Recommendations for Change…, pp. 35–41.
16 The proposed restrictions include: (1) 10 percent of total assets limit on consumer loans, (2) 3 percenc of total assets limit on leeway provision for community rehabilitation and development loans and equity-participation real estate loans, and (3) 10 percent of total assets limit on investments in commercial paper and corporate bonds. This last limit would start at 2 percent and rise by 2 percentage points each year for four more years. Any unused portion of this authority could be used to make consumer loans in addition to the 10 percent limit listed above.
17 Gibson, “‘Hot Money.’” Viability can also be defined in terms of being able to continue lending activities in an orderly manner when rates rise; that is, not being unwilling to lend at virtually any terms offered. Thrifts might still be too specialized to avoid this, disruption. But since such disruption would likely primarily impact the mortgage market and since the enforced specialization remaining under the proposed system would be there to protect the mortgage market, perhaps we can look to the housing lobby to remedy this excessive specialization should it adversely impact thrift lending.
18 See, for instance, the testimonies of virtually all Thrift institution and home building representatives in The Credit Crunch and Reform of Financial Institutions, hearings before the Committee on Banking and Currency, U.S. House of Representatives, Ninety-Third Congress, First Session, September 10–14, 1973.
19 All figures on noncompetitive bids are from the Treasury Bulletin, various issues.