why replicate banking: the return of free banking thought?
TRANSCRIPT
Why Replicate Banking: The
Return of Free Banking Thought?
Liping Zhou Institute of Finance and Banking, Chinese
Academy of Social Science
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?
Contents
I Free Banking Thoughts
II Evolution of Banking Franchise
III External Power of Replicating
Banking: Financial Regulation
VI Conclusion
I Free Banking Thoughts
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
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.
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.
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.
II Evolution of Banking Franchise
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.
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.
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.
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.
III External Power of Replicating
Banking: Financial Regulation
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.
Sources:Sherman,M.(2009):“A Short History of Financial Deregulation in the United States”,Center for Economic and Policy Research.
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.
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.
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.
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.
VI Conclusion
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.
The End
Thank You!