Views on the role played by banks in the economy have evolved greatly over the last 125 years, as have arguments on the need, as well as the best way, to regulate them. Some of the key insights in the debate have been published in the Journal of Political Economy. In what follows, we will outline the main contributions to the debate in recent years, with an emphasis on work done at the University of Chicago or published in the JPE. We want to emphasize work that has relevance today, but despite this caveat, we will probably end up doing injustice to work published long ago. We begin with a framework for organizing the theories of intermediation. We then draw out the implications for what the theories say about regulation and note that in many respects the motivation for regulation has been only loosely tied to the theory of intermediation. We close with some open questions for regulators and economists interested in banking. We do not survey the research that has followed up on work published in the JPE, nor will we attempt to provide a detailed overview of the entire academic literature on banking. For that, we refer the reader to the excellent work by Gorton and Winton (2003) and Freixas and Rochet (2008

Recent work on the theory of the firm under regulation suggests that managers of regulated firms may be utility maximizers rather than profit maximizers. There is, however, very little empirical evidence on managerial behavior in regulated industries. This article examines one kind of utility-maximizing behavior that seems particularly applicable to regulated firms: expense-preference behavior. Specifically, I develop a test capable of discriminating between expense-preference and profit-maximizing behavior and apply it to the banking industry, a highly regulated industry. My findings indicate that an expense-preference theoretical framework better explains the behavior of regulated firms than does a profit-maximization framework

Recent work on the theory of the firm under regulation suggests that managers of regulated firms may be utility maximizers rather than profit maximizers. There is, however, very little empirical evidence on managerial behavior in regulated industries. This article examines one kind of utility-maximizing behavior that seems particularly applicable to regulated firms: expense-preference behavior. Specifically, I develop a test capable of discriminating between expense-preference and profit-maximizing behavior and apply it to the banking industry, a highly regulated industry. My findings indicate that an expense-preference theoretical framework better explains the behavior of regulated firms than does a profit-maximization framework

We modify the 1983 Diamond and Dybvig model so that banks offer liquidity services to depositors, raise equity funding, make risky loans, and invest in safe, liquid assets. Banks monitor borrowers to ensure that they repay loans and they are susceptible to depositor runs. We model the run decision by solving a novel global game. Relative to a social planner, banks opt for a more deposit-intensive capital structure, their assets may be more or less lending intensive, and the level of lending may be higher or lower. Correcting these three distortions requires a package of three regulations

We empirically document two adjustment margins that are usually absent from the predominant “bank balance sheet lending” view of financial intermediation. For the shadow bank substitution margin, shadow banks substitute for traditional banks among loans that are easily sold. For the balance sheet retention margin, banks switch between balance sheet lending and selling loans based on their balance sheet strength. Estimates from a structural model show that these margins significantly shape policy responses, dampening the effect of capital requirements on lending whose costs are borne by wealthier borrowers. Secondary-market disruptions such as quantitative easing have significantly larger impacts on lending than capital requirements

In this paper the authors examine the effect of competition in the market for bank acquisitions on the acquirers' stock returns. Bank acquisitions are examined because federal and state regulations greatly facilitate the identification of potential bidders and alter native targets in an acquisition. They find that the gain to acquirers is positively related to the number of alternative target firms available and negatively related to the number of other potential bidders. These results provide some insights into the sources of gains from bank acquisitions

This paper endogenizes intervention in financial crises as the strategic negotiation between a regulator and creditors of distressed banks. Incentives for banks to contribute to a voluntary bail-in arise from their exposure to financial contagion. In equilibrium, a bail-in is possible only if the regulator’s threat to not bail out insolvent banks is credible. Contrary to models without intervention or with government bailouts only, sparse networks enhance welfare for two main reasons: they improve the credibility of the regulator’s no-bailout threat for large shocks, and they reduce free-riding incentives among bail-in contributors when the threat is credible

To study the impact of macroprudential policy on credit supply cycles and real effects, we analyze dynamic provisioning. Introduced in Spain in 2000, revised four times, and tested in its countercyclicality during the crisis, it affected banks differentially. We find that dynamic provisioning smooths credit supply cycles and, in bad times, supports firm performance. A 1 percentage point increase in capital buffers extends credit to firms by 9 percentage points, increasing firm employment (6 percentage points) and survival (1 percentage point). Moreover, there are important compositional effects in credit supply related to risk and regulatory arbitrage by nonregulated and regulated but less affected banks

The Federal Reserve Board is empowered to formulate rules and regulations for putting into effect many requirements which very wisely are expressed in general terms in the Federal Reserve Act. One of the first and most important duties of the Board will be to determine the character of the paper which the reserve banks may rediscount for member banks. In this particular instance the act is explicit regarding certain requirements, while others are left to the determination of the Board in accordance with general principles laid down in the measure. Rediscounts are restricted to paper maturing within ninety days, aside from a limited amount of agricultural and live-stock paper maturing within six months. Notes, drafts, and bills of exchange may be rediscounted; in other words, form is immaterial, since practically all kinds of negotiable instruments used for borrowing purposes are included. Collateral loans when the collateral consists of stocks or bonds are specifically excluded from rediscount, while commercial paper, whatever its form, is eligible. The act does not define commercial loans except in most general terms, but directs the Federal Reserve Board to do so more precisely. The provision in the act regarding the general character of the paper which may be rediscounted reads as follows: Upon the indorsement of any of its member banks, with a waiver of demand, notice, and protest by such bank, any Federal reserve bank may discount notes, drafts, and bills of exchange arising out of actual commercial transactions; that is, notes, drafts, and bills of exchange issued or drawn for agricultural, industrial, or commercial purposes, or the proceeds of which have been used, or are to be used, for such purposes, the Federal Reserve Board to have the right to determine or define the character of the paper thus eligible for discount, within the meaning of this Act

THE time is not very remote when the idea that the workingman could not only satisfy his immediate wants but make some provision for the future was scarcely entertained. At the present time it is not going too far to say that much of the best efforts now being put forth for the improvement of the welfare of the working classes has this object in view. The present century, and particularly its last half, has seen the creation and rapid development of provident institutions of all sorts. The movement for workingmen's insurance has swept over Europe, resulting in the enormous extension, either under the auspices of the state or through voluntary efforts of this form of provision for the future. Raiffeisen, Schulze-Delitzch, people's banks, co-operative credit, and kindred institutions, have been organized in great numbers throughout Europe. Savings banks, so organized as to appeal directly to the poorer classes, have progressed with remarkable rapidity. In this movement the state has felt compelled to play a part. In addition to assuming a more or less strict regulative control