This paper investigates the incentives of a regulator to close depository institutions, recognizing that an institution′s risk taking will be influenced by the regulator′s policy regarding bank closure and that there are opportunity costs in closing banks arising from their intermediation function. The regulator focuses not on the current portfolio of the bank, but on the bank′s future portfolio. Even if the regulator seeks to maximize welfare, the first best is not obtainable because the regulator is unable to credibly commit to certain policies regarding closure. Journal of Economic Literature Classification Numbers: G2, L5, G1

1. A Framework for Ethical Decision Making. 2. Diagnosing and Treating Market Inadequacies. 3. The Legal System, Product Liability and the Creative Use of Bankruptcy. 4. Environmental Issues and the Law of Damages. 5. Fraud, Legal and Financial Agency, Ethics and the Fiduciary Relationship. 6. Regulation: With an Emphasis on Financial Markets. 7. Regulating Financial Markets: Commercial Banking. 8. Regulating Financial Markets: Investment Banking, Securities Markets and Money Management. 9. Corporate Power and Social Responsibility and the Issue of Antitrust. Index

In April 1991, regulators seized the major subsidiaries of First Executive Corporation (FE), an insurer that invested heavily in junk bonds. During the junk bond market turmoil of 1989–1990, adverse publicity fueled a bank run at FE, forcing a $4 billion portfolio liquidation before the market rose 50–60% in 1991–1992. More traditional insurers did not receive commensurate press coverage, despite their substantial exposure to real estate declines, which were roughly 2.5 times the junk bond decline. Seizure of FE's subsidiaries was defensible, although FE would have become solvent within a year, given average junk bond market appreciation

During the 1980s, the centre of financial market power moved from the United States to Japan and Germany. Having made the classic lending mistakes, American bankers were mauled in cut-throat competition. By the end of the decade, however, the inflection point had been reached and new competitive and economic forces had begun to shift the centre of power once again. In Global Champions, Roy Smith shows how the bases of banking competitiveness are changing, from the size of assets and profitable systems protected by regulation to market know-how, innovation, and technology. He reviews the past and present of the US, European and Japanese financial systems, and provides insights into their futures. European banks, he demonstrates, are in the early stages of a free-market renaissance for which many are ill-prepared. For the powerful German banks, events in Eastern Europe and eastern Germany will be a continuing distraction. Japanese banks and brokers, weakened by losses and scandal, have passed their peaks as superpowers. They now face major regulatory changes that will disrupt their once sage and profitable franchises. As the title indicates, Smith foresees a revival in the competitive position of US banking and finance. He shows how US banking will split into two distinct parts: large, technologically advanced retail companies and market-oriented investment bankers and wholesalers. As the 1990s unfold, survivors of the wild ride of the 1980s will adapt to life on the cutting edge of competition and will spearhead a recovery of American financial power