why replicate banking: the return of free banking thought?

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Why Replicate Banking: The Return of Free Banking Thought? Liping Zhou Institute of Finance and Banking, Chinese Academy of Social Science [email protected]

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Page 1: Why Replicate Banking: The Return of Free Banking Thought?

Why Replicate Banking: The

Return of Free Banking Thought?

Liping Zhou Institute of Finance and Banking, Chinese

Academy of Social Science

[email protected]

Page 2: Why Replicate Banking: The Return of Free Banking Thought?

Nature of Shadow Banking

The Nature of Shadow Banking: Short-term Debt

Banking and Shadow Banking: New Free Banking

But Free Banking has been Disappeared: Strict

Entering Threshold of Commercial Banking

Questions: Why and How to Replicate Banking?

Page 3: Why Replicate Banking: The Return of Free Banking Thought?

Contents

I Free Banking Thoughts

II Evolution of Banking Franchise

III External Power of Replicating

Banking: Financial Regulation

VI Conclusion

Page 4: Why Replicate Banking: The Return of Free Banking Thought?

I Free Banking Thoughts

Page 5: Why Replicate Banking: The Return of Free Banking Thought?

Classic Free Banking Thoughts

Thoughts of Equality and Democracy

James Steuart(1767):An Inquiry into

the Principles of Political Economy

Free Banking School: Parnell

Classic Debate: Parnell v.s. Tooke

Currency School, Banking School, Free

Banking School

Page 6: Why Replicate Banking: The Return of Free Banking Thought?

Modern Opinion of Free Banking

Modern Scholars of Free Banking:Vera

Smith、Lawrence White

Common Points: Optimal Monetary

Aggregates, Banking’s Liability Can’t Be

Monetary Policy Goal.

Core of Free Banking Thoughts: Laissez

Faire, Deregulation, Competitive

Banknotes Issue and Credit-creation.

Page 7: Why Replicate Banking: The Return of Free Banking Thought?

First Return of Free Banking Thoughts

Core Opinion: Commercial banking in

complete competition

Tobin, Johnson, Black, Fama, Gurley and

Shaw, Patinkin, Pesek and Saving, et.al.

Possible result of complete competition:

Difference between banks and NBFIs

disappears, Free fluctuation of price,

Floating goals of macro-control.

Page 8: Why Replicate Banking: The Return of Free Banking Thought?

Shadow Banking: The Second Return ?

Shadow banking: So near to some ideas.

Shadow banking: the practice of first

general scholars’ thoughts? It’s return is

necessary from the perspective of

banking franchise.

High banking franchise attracts shadow

banking?

Banking franchise: basic contents.

Page 9: Why Replicate Banking: The Return of Free Banking Thought?

II Evolution of Banking Franchise

Page 10: Why Replicate Banking: The Return of Free Banking Thought?

Banking Franchise in Free Banking Era

High franchise or low franchise?

Banking franchise of issuing banknotes.

British Peel’s Act and American 1838

Bank’s Law of New York both set

threshold for bank entrance, which was

the determinant factor of banking

franchise. But the developing chance was

good enough without limitation on bank’s

core business.

Page 11: Why Replicate Banking: The Return of Free Banking Thought?

Banking Franchise in Central Banking Era

Central bank law removed the right of

regional banks’ issuing banknotes. The

charter value of issuing climbed to the

highest point.

In the meantime, both the thoughts and

practice of financial innovation had

spread among commercial banks, which

implicitly lowered banking franchise.

Lessons: Equal banking franchise value.

Page 12: Why Replicate Banking: The Return of Free Banking Thought?

Banking Franchise in Listed Banking Era

Banking franchise is positive related to

market value of bank stock, market power of

pricing, operating efficiency, non-interest

income; negative to intangible assets account

value, defaulting risk.

Banking franchise becomes more similar to

common companies with high relation to

equity, debt, market value, operating

efficiency and defaulting risks, et.al.

Page 13: Why Replicate Banking: The Return of Free Banking Thought?

Summary: Banking Franchise Value

Banking franchise in three historical periods.

Banking franchise attracts non-bank financial

institution(NBFIs) taking bank-like activity

with the inner innovation of banks such as

securitization.

Conclusion: banking franchise is the inner

power of NBFI’s replicating banks.

Page 14: Why Replicate Banking: The Return of Free Banking Thought?

III External Power of Replicating

Banking: Financial Regulation

Page 15: Why Replicate Banking: The Return of Free Banking Thought?

Evolution of American’s Banking Law and

Financial Regulation

Two laws resulted in shadow banking:

banking law and act of security issue of

money market.

Banking act and regulation generally show

the tendency of loosening, which is benefit

for off-balance sheet innovation.

The loosening of law of security issue in

money market encouraged issuing of credit

notes.

Page 16: Why Replicate Banking: The Return of Free Banking Thought?

Sources:Sherman,M.(2009):“A Short History of Financial Deregulation in the United States”,Center for Economic and Policy Research.

Page 17: Why Replicate Banking: The Return of Free Banking Thought?

Simple Comment on Banking Law

Negative factors: financial regulation

encouraged financial development and

innovation since 1970s.

Positive Factors: central banking law,

supervision of capital adequacy and industrial

structure, et.al.

Negative factors gradually surpassed positive

factors

Result: financial regulation lowered banking

franchise.

Page 18: Why Replicate Banking: The Return of Free Banking Thought?

Regulation on Security Issuing in U.S Money Market

SEC and Fed had no strict limitation on short-term

debt notes, which provide ways of financing and

packaging credit assets for NBFIs.

Law of asset-management had no restrict

qualification of security issue, which permitted

NBFIs participating in all the chain of credit asset

trading.

These two factors make shadow banking have the

core function of banking.

Page 19: Why Replicate Banking: The Return of Free Banking Thought?

Regulation on Credit Asset Trading

Primary credit market is under clear banking

regulation, but the second one is lack of

unified regulation.

Credit asset investment laws is beneficial for

shadow banking get credit assets.

Credit asset trading is a double-edged sword

for banks.

Page 20: Why Replicate Banking: The Return of Free Banking Thought?

Comment on External Factors

Loosening of banking law and security issue

promoted the boosting of shadow banks’

balance sheet.

Reasons of loosening laws: financial

liberalization pushed by ideas of free

competition in market, international financial

center competition.

Page 21: Why Replicate Banking: The Return of Free Banking Thought?

VI Conclusion

Page 22: Why Replicate Banking: The Return of Free Banking Thought?

Why and How to Replicate

Banking?

Basic driving force: idea of free banking.

Commercial banks’ constant financial innovation.

Loosening of financial regulation.

Banking franchise in special conditions attracts

shadow banking.

Meanwhile, the factors promoting replicating

banking lowers banking franchise.

Shadow banking may be real banking in the new

financial system.

Page 23: Why Replicate Banking: The Return of Free Banking Thought?

The End

Thank You!