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Economic Review

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Vol. 92, Nos. 1 and 2
First and Second Quarters 2007


Features

A SPECIAL FOCUS ON
Safe and Sound Banking: Past, Present, and Future

Safe and Sound Banking Twenty Years Later: What Was Proposed and What Has Been Adopted

Safety, Soundness, and the Evolution of the U.S. Banking Industry

Supervising Bank Safety and Soundness: Some Open Issues

Roundtable Discussion: Reflection on Twenty Years of Bank Regulatory Reform

Staff

 

 

 
Supervising Bank Safety and Soundness: Some Open Issues
Mark J. Flannery

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This article identifies underresearched and/or underappreciated issues that affect bank safety and soundness or financial system stability. The author begins by discussing the goals of safety and soundness supervision and then focuses on seven imperfectly understood, and often intertwined, issues: credit rating agencies; the combination of banking and commerce; nationwide depositor preference and the distribution of liability-holders' risk exposures; systemic risk; capital adequacy; market discipline; and credible resolution procedures for the failure of large financial firms. Many of these open issues are similar to those that Benston et al. discussed in 1986, and all deserve serious scholarly attention, the author notes.

Commentaries

What Reforms Are Needed to Improve the Safety and Soundness of the Banking System? Adobe Acrobat symbol
Harvey Rosenblum
To further improve bank safety and soundness in the years ahead, the author makes two recommendations: that banks be examined and rated specifically on their organizational complexity and that systemically important banks that are too big to resolve quickly be recapitalized according to a model that is known in advance by their competitors and by the general public.

Two Key Issues Concerning the Supervision of Bank Safety and Soundness Adobe Acrobat symbol
Dwight M. Jaffee
This commentary focuses on two specific issues. The first asks, What are the market failures that actually create the need for the public regulation of bank safety and soundness? The second issue concerns the safety and soundness issues created by the two mortgage government-sponsored enterprises, Fannie Mae and Freddie Mac, whose very large financial obligations pose a serious systemic risk threat to U.S. financial markets.