The Social Value of the Financial Sector: Too Big to Fail or Just Too Big?

536 Pages·2013·4.5 MB·English

by  Viral V. Acharya

THE SOCIAL VALUE OF
THE FINANCIAL SECTOR
Too Big to Fail or Just Too Big?
8865hc.9789814520287_tp.indd 1 18/9/13 10:12 AM
World Scientific Studies in International Economics
(ISSN: 1793-3641)
Series Editor Robert M. Stern, University of Michigan and
University of California-Berkeley, USA
Editorial Board Vinod K. Aggarwal, University of California-Berkeley, USA
Alan Deardorff, University of Michigan, USA
Paul DeGrauwe, Katholieke Universiteit Leuven, Belgium
Barry Eichengreen, University of California-Berkeley, USA
Mitsuhiro Fukao, Keio University, Tokyo, Japan
Robert L. Howse, New York University, USA
Keith E. Maskus, University of Colorado, USA
Arvind Panagariya, Columbia University, USA
Vol. 22 International Trade Policy Formation: Theory and Politics
by Wolfgang Mayer (University of Cincinnati, USA)
Vol. 23 Priorities and Pathways in Services Reform:
Part I — Quantitative Studies
edited by Philippa Dee (Australian National University, Australia)
Vol. 24 Globalizing Information: The Economics of International Technology Trade
by Keith E Maskus (University of Colorado at Boulder, USA)
Vol. 25 Priorities and Pathways in Services Reform: Part II — Political Economy Studies
edited by Christopher Findlay (University of Adelaide, Australia)
Vol. 26 World Trade Organization and International Trade Law: Antidumping,
Subsidies and Trade Agreements
by Gary N Horlick (Law Offices of Gary N Horlick, USA & University of Bern,
Switzerland)
Vol. 27 European Economic Integration, WTO Membership, Immigration and Offshoring
by Wilhelm Kohler (University of Tübingen, Germany)
Vol. 28 Services Trade Reform: Making Sense of It
by Philippa Dee (Australian National University, Australia)
Vol. 29 The Social Value of the Financial Sector: Too Big to Fail or Just Too Big?
edited by Viral V Acharya (New York University, USA & Centre for Economic Policy
(CEPR), UK), Thorsten Beck (Tilburg University, The Netherlands & Centre for
Economic Policy (CEPR), UK), Douglas D Evanoff (Federal Reserve Bank of
Chicago, USA), George G Kaufman (Loyola University Chicago, USA), &
Richard Portes (London Business School, UK & Centre for Economic Policy
(CEPR), UK)
Vol. 30 The Role of Central Banks in Financial Stability: How Has It Changed?
edited by Douglas D Evanoff (Federal Reserve Bank of Chicago, USA),
Cornelia Holthausen (European Central Bank, Germany), George G Kaufman
(Loyola University Chicago, USA) & Manfred Kremer (European Central Bank,
Germany)
The complete list of the published volumes in the series can be found at
http://www.worldscientific.com/series/wssie
29 World Scientific
Studies in
International
Economics
THE SOCIAL VALUE OF
THE FINANCIAL SECTOR
Too Big to Fail or Just Too Big?
Editors
Viral V Acharya
New York University, USA & Centre for Economic Policy (CEPR), UK
Thorsten Beck
Tilburg University, The Netherlands & Centre for Economic Policy (CEPR), UK
Douglas D Evanoff
Federal Reserve Bank of Chicago, USA
George G Kaufman
Loyola University Chicago, USA
Richard Portes
London Business School , UK & Centre for Economic Policy (CEPR), UK
World Scientific
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8865hc.9789814520287_tp.indd 2 18/9/13 10:12 AM
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Library of Congress Cataloging-in-Publication Data
Acharya, Viral V.
The social value of the financial sector : too big to fail or just too big? / by Viral V Acharya
(New York University, USA & Centre for Economic Policy (CEPR), UK), Thorsten Beck (Centre
for Economic Policy (CEPR), UK & Tilburg University, The Netherlands), Douglas D Evanoff
(Federal Reserve Bank of Chicago, USA), George G Kaufman (Loyola University Chicago, USA)
& Richard Portes (Centre for Economic Policy (CEPR), UK & London Business School , UK).
pages cm. -- (World scientific studies in international economics, ISSN 1793-3641 ; 29)
Includes bibliographical references and index.
ISBN 978-9814520287
1. Financial institutions. 2. Financial institutions--Government policy. 3. Banks and banking.
4. Social policy. I. Title.
HG173.A224 2013
332.1--dc23
2013027960
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library.
Cover Illustration by Ping Homeric.
Copyright © 2014 by World Scientific Publishing Co. Pte. Ltd.
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Printed in Singapore
September17,2013 11:3 SocialValueoftheFinancialSector:TooBigtoFallorJustTooBig 9inx6in b1606-fm
Preface
The large-scale damage inflicted on the economies of countries through-
out the world by the financial crisis of 2007 to,at least,2010,has ignited
widespreadre-evaluationof thenetsocialbenefitsderivedfromlargeand
growingdomesticandinternationalfinancialsectors.Thesesectorstended
toexpandmuchfasterbeforethecrisisthandidtheirnationalGDPs.For
example,theaggregateon-balance-sheetdollarsizeof the11majortypes
ofUSfinancialinstitutionsincludedintheFederalReserve’sflowoffunds
data more than doubled from 1.27% of GDP in 1970 to 2.85% of GDP
in2007.
A large number of empirical research studies have provided evidence
thatdeeperandmoreefficientfinancialsystemsareassociatedinthelonger
runwithhigherandmorerapideconomicgrowth.Butperiodically,thesys-
temcrashes,andthelargerthesystem,thedeeperandbroaderthedamage.
Doesthedamagepartially,totally,ormorethantotallyoffsetthegainsreal-
izedfromthefinancialsectorduringnoncrisisperiods?Wetypicallythink
of market distortions, and resulting adverse welfare effects, from having
financial institutions that are too-big-to-fail. However, it may be that in
certaincases,thefinancialsectorissimplytoobig,resultingininefficien-
ciesandgeneratingsocietalwelfarelosses.Ifthisisthecase,howcanpublic
policydosomethingaboutit?
These were some of the major questions addressed by participants
at the Fifteenth Annual Federal Reserve Bank of Chicago International
Banking Conference, cosponsored with the Centre for Economic Policy
Research (CEPR) in London. The conference was held in Chicago on
November15–16,2012.Some175participants,representingpolicymakers,
financial regulators, financial practitioners, researchers, and academics
from some 30 countries participated. Specific topics discussed included
the costs and benefits of the current financial industry structure, social
benefits from financial industry innovation,effects of regulation on soci-
etal welfare,the financial situation and resulting economic activity across
v
September17,2013 11:3 SocialValueoftheFinancialSector:TooBigtoFallorJustTooBig 9inx6in b1606-fm
vi Preface
countries,andthepotentialbenefitsandcostsassociatedwiththebreaking
upoflargebanks.
This volume includes the papers presented at the Chicago conference,
includingthekeynoteaddressesbyleadingexpertsinthefield.Thepubli-
cationof thepapersinthisvolumeisintendedtodisseminatetheconfer-
ence ideas,analyses,and conclusions to a wider audience. Hopefully,that
broaderdistributionwillgenerateadditionaldiscussion,serveasthebasis
forfurtheranalyses,andbeusedtoguidepublicpolicy.
September17,2013 11:3 SocialValueoftheFinancialSector:TooBigtoFallorJustTooBig 9inx6in b1606-fm
Acknowledgments
BoththeconferenceheldattheFederalReserveBankofChicago,Novem-
ber 15–16, 2012, and this volume represent a joint effort of the Federal
Reserve Bank of Chicago and the Centre for Economic Policy Research
(CEPR).Various people at each institution contributed to the effort. The
fiveeditorsservedastheprincipalorganizersoftheconferenceprogramand
wouldliketothankallthepeoplewhocontributedtheirtimeandenergy
to the effort.At the risk of omitting some people,we would like to thank
JuliaBaker,JohnDixon,EllaDukes,PingHomeric,andRitaMolloy.Special
mention should be accorded Kathryn Moran,who managed the Chicago
Fed’s web effort; Sandy Schneider,who expertly managed the conference
administration;aswellasHelenO’D.KoshyandSheilaMangler,whohad
primaryresponsibilityforpreparingthemanuscriptsforthisbook.
vii
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Contents
Preface v
Acknowledgments vii
PartI. KeynoteAddresses 1
Chapter1. AFermentofRegulatoryProposals 3
CharlesA.E.Goodhart
Chapter2. ProgressandPrioritiesforFinancialReform 11
MaryJohnMiller
PartII. DescriptionandMeasurement
oftheFinancialSystem 21
Chapter3. WhatIsMeaningfulBankingReform,WhyIsIt
SoNecessary…andSoUnlikely? 23
CharlesW.Calomiris
Chapter4. TheGreatLeveraging 33
AlanM.Taylor
Chapter5. FinanceandEconomicDevelopment
inaModelwithCreditRationing 67
Jean-LouisArcand,EnricoBerkes,andUgoPanizza
Chapter6. TooMuchFinance,TooMuchCredit?
CommentsonPapersbyCalomiris,
Arcand–Berkes–Panizza,andTaylor 81
EugeneN.White
ix