The emergence and regulation of contingent commitment banking

John H. Kareken

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8 Scopus citations

Abstract

In but a relatively few years banking has changed considerably. Now it is very much a business of making contingent promises or commitments; and even just a decade ago it was not. Recognizing change is apparently easier, though, than accounting for it. Or than not worrying about it. In this paper, an attempt is made to account for the change from traditional to contingent commitment banking, an attempt which must, however, be regarded as less than brilliantly successful. And responding to the concern that has been expressed by, among others, Federal Reserve officials, it is argued that even if banking keeps on changing until the last vestige of the traditional has disappeared, the Federal Reserve need not in the end be less effective as the U.S. monetary authority than it is at present. There is also a concern, shared by some Federal Reserve officials, that if change persists, then, unless bank regulatory policy is altered appropriately, financial stability will be increasingly threatened. That could be, but as is argued in the paper it is far from obvious that more capital (and/or a risk-adjusted capital requirement) will make bank failures rarer than they otherwise would be.

Original languageEnglish (US)
Pages (from-to)359-377
Number of pages19
JournalJournal of Banking and Finance
Volume11
Issue number3
DOIs
StatePublished - Sep 1987

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