The Structure and the Evolution of the U.S. Financial System, 1945-1986

Abstract

The New Deal regulatory policies and institutions redesigned the u.s. financial structure and implicitly required the coordination between monetary policy and the regulatory framework; in that financial structure the Federal reserve provided the reserves. The interest policy implicitly required the calibration and coordination of deposit ceiling rates and the prevailing market rate set by the Fed. However, the Treasury-Federal reserve Accord of 1951 effectively dismantled the necessary coordination between monetary policy and the banking regulatory framework. The combination of interest rate differentials and reliance on markets as a liquidity provider triggered the creation of new financial instruments and institutions that changed the structure of the u.s. banking system. This policy encouraged the development of a financial system in which financial institutions seek to escape regulations. For instance, nonbank financial institutions escaped regulations and entered into the banking business model, getting both market share and profits of the regulated banking system. The New Deal constraints combined with innovation and competition between regulated and unregulated banks encouraged the emergence of shadow banks, as the latter were not subject to constraints.

Data Mining and Economic Application in the Age of Financial Big Data: A Case Study of Shadow Banking and Interest Rate Liberalization in China

“…Interest rate liberalization means that the pricing interest rate that financial institutions depend on is determined by market supply and demand. In his study on the U.S. banking industry from 1970 to 1986, de Rezende [2] found that financial innovation and reform of the interest rate liberalization in the U.S. were triggered by the choice of capital investment outside the bank channel, as the low deposit interest rate of banks is not appealing under the restraint of Q treaty. Xiao [3] believed that the pricing mechanism of shadow banks can better reflect the supply and demand of market funds, contributing to the marketization of RMB interest rates.…”

Financial Fragility in the Current European Crisis

“…Banks suffered from the competition by non-banks because the latter were allowed to offer higher interest rates on deposits-like assets. Banks were obliged by regulation q to offer fixed low interest rates on deposits ( see Rezende 2011, Kregel 2010. Thus in order to help them compete they were allowed to develop new products, mainly securities, on which regulation q did not apply, and then slowly the Glass-Steagall Act was abolished.…”