The effectiveness of bank capital adequacy requirements is examined in this paper. Using empirical tests similar to those employed by Peltzman and Mingo, no significant relationship is found between changes in bank capital and the capital standards imposed by regulators. The findings conflict with those of previous studies. The conflict in findings, it is argued, results from the failure of previous studies to account for the effect of binding deposit rate ceilings

The effectiveness of bank capital adequacy requirements is examined in this paper. Using empirical tests similar to those employed by Peltzman and Mingo, no significant relationship is found between changes in bank capital and the capital standards imposed by regulators. The findings conflict with those of previous studies. The conflict in findings, it is argued, results from the failure of previous studies to account for the effect of binding deposit rate ceilings

Regulations prohibiting the payment of explicit interest on demand deposits are gradually being eased. As banks switch from payment in the form of free services to explicit interest, both the level of money demand and the response of money demand to market interest rates will change. Banks are modeled here as being Chamberlinian monopolistic competitors. Equilibrium deposit interest rate relationships are found for markets both with and without an effective interest rate ceiling and the behavior of the two markets is compared. The elimination of deposit interest rate ceilings leads to increased money demand and an increased responsiveness of deposit rates to market interest rates

If insuring creditors of commercial banks in the way they have been insured since mid-1933 is justified, then so is regulation of so-called insured banks, those with creditors insured by the Federal Deposit Insurance Corporation (FDIC). In creating the FDIC, the Congress mandated a pricing policy: all banks with FDIC-insured creditors were to be charged alike; more particularly, the FDIC was not to charge insured banks according to the riskiness of their respective balance sheets. Nor has it ever. Yet, with an insurance premium that is constant across balance sheets, there is an incentive for risk taking. And thus, unless insured banks are to be as risky as profit maximization dictates, they must, one way or another, be effectively regulated; they must, that is, be limited by regulation to appropriately risky balance sheets. It does not follow that U.S. bank regulatory policy of the years since 1933 is beyond criticism. For example, we must wonder about the geographical restrictions imposed under the McFadden Act and the Douglas Amendment to the Bank Holding Company Act. But it does follow that if banks with FDIC-insured creditors are to be made entirely free, except perhaps of reserve requirements, or even largely free, then it is necessary to either close up the FDIC or, if doing that seems unwise, change FDIC policy. There has already been some deregulation. Most importantly, Regulation Q has been made much less effective than it was; and evidently it has been marked to become, very soon, a thing of the past. So far, however, beyond deregulating, the Congress has not bestirred itself. The FDIC is still occupying its Washington corner. Although FDIC officials have hinted at change, its policy is still by and large what it was. And the Congress, being ever so respectful of the consumer lobby, may never want to do anything. Nevertheless, in this paper I consider various things it might do: namely, close down the FDIC, but at the same time impose a new valuation rule for bank portfolios; change FDIC pricing policy; and, lastly, without doing anything else, simply close down the FDIC. I do not end up by saying what, as I believe, the Congress ought to do. My purpose is only to determine, as best I am able, which of those several apparent congressional options of mine are in reality feasible. I would add, however, that the Congress, if bent on deregulating banks or obliging the regulatory agencies, has more to do than decide what to do about the FDIC. It seems also to be bent on deregulating or allowing the deregulation of savings and loan associations. There has already been more deregulation of savings and loan associations than of banks. So the Congress has also to decide what to do about the Federal Savings and Loan Insurance Corporation (FSLIC). Fortunately, to explore what it might do about the FDIC is perforced to explore what it might do about the FSLIC

The 1968 amendment to Regulation D of the Federal Reserve Code permits banks to carry forward one sequential reserve excess or deficiency into the next reserve accounting period. This was intended to reduce the weekly pressure on individual banks to adjust their reserve position. We find, instead, that the carry‐forward provision gives individual banks an incentive to alternate weekly between reserve excesses and reserve deficiencies. Thus, the carry‐forward provision tends to induce reserve position adjustments even in the absence of changes in the level of deposits. In addition, the carry‐forward provision reduces the impact of interest‐rate changes on the desired level of excess reserves

The 1968 amendment to Regulation D of the Federal Reserve Code permits banks to carry forward one sequential reserve excess or deficiency into the next reserve accounting period. This was intended to reduce the weekly pressure on individual banks to adjust their reserve position. We find, instead, that the carry-forward provision gives individual banks an incentive to alternate weekly between reserve excesses and reserve deficiencies. Thus, the carry-forward provision tends to induce reserve position adjustments even in the absence of changes in the level of deposits. In addition, the carry-forward provision reduces the impact of interest-rate changes on the desired level of excess reserves

The traditional analysis of the relative pricing of tax-exempt and taxable debt is a habitat theory of the term structure of interest rates. In the traditional analysis the preferences of investors for particular maturities of debt lead to unique pricing relations at every point on the yield curve which are indicative of investor marginal tax brackets. Recent work by Fama (1977) suggests that banks are potential arbitrageurs across tax-exempt and taxable bond markets which force a particular equilibrium on the pricing of short-term bonds. Miller (1977) suggests that the choice of debt or equity financing by firms in the aggregate forces a similar equilibrium on the pricing of all tax-exempt and taxable bonds. This paper exploits the institution of Regulation Q and its effects on the banking system to bring evidence to bear on the predictions of these three models