1. Copyright © 2002 Pearson Education, Inc. Slide 15-1 Pattern of Crisis and Regulation First stage: crisis in the banking industry. Second stage: government steps in to end the crisis through regulation. Third stage: response by the financial system. Fourth stage: regulatory response.

2. Copyright © 2002 Pearson Education, Inc. Slide 15-2 Lender of Last Resort

3. Copyright © 2002 Pearson Education, Inc. Slide 15-3 Interest Rate Ceilings

4. Copyright © 2002 Pearson Education, Inc. Slide 15-4 Deposit Insurance

5. Copyright © 2002 Pearson Education, Inc. Slide 15-5 Crisis and Response Stock Market Crash, 1929 Britain off Gold, Sept. 1931 Banking Crises, 1932-33 Credit Crunch, 1966 Penn Central Bankruptcy, 1970 Franklin National Bank, 1974 Continental Illinois, 1975 Hunt Brothers Silver Corner Stock Market Crash, 1987 S & L Debacle, 1989 – 91 Penn Square/Oil Patch/Junk Bonds Tequila Crisis, 1994-5 Asian Contagion, 1997 – 8 Long – Term Capital Management, 1998 911 Enron, 2001 Argentina, 2001

6. Copyright © 2002 Pearson Education, Inc. Slide 15-6 Proposals for Regulatory Reform Reduce the level of deposit insurance coverage. Narrow banking: insuring deposits in safe assets. Deposit insurance can be provided by private insurance companies. Risk-based pricing of deposit insurance Market-value accounting