金融防火墙在金融集团中的作用.docx
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金融防火墙在金融集团中的作用.docx
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金融防火墙在金融集团中的作用
TheRoleofFirewallsinUniversalBanks:
EvidencefromCommercialBankSecuritiesActivitiesbeforetheGlass-SteagallAct
RandallS.KrosznerandRaghuramG.Rajan,UniversityofChicago
Thissummaryexcludesallfootnotes,mosttables,andmuchtextofthecompletepaper,whichisavailableonrequestfromtheauthors.Pleasedonotciteorquotethissummary.
I.Introduction
Before1933commercialbanks,eitherthroughtheirsecuritiesdepartmentsorthroughseparatelyincorporatedsecuritiesaffiliates,competeddirectlywithinvestmentbanksinoriginatingandunderwritingsecuritiesissues.TheGlass-SteagallActof1933endedthiscompetitionbylegislatingtheseparationofcommercialandinvestmentbankingintheU.S.Thecommercialbankswereaccusedofsuccumbingtotheconflictsofinterestinherentintheirdualcapacityasunderwriterandlender,andhence,ofsystematicallymisrepresentingthequalityofsecuritiestoagulliblepublic.Recentstudies,however,havefoundnoevidencethatsuchsystematicfoolingdidindeedtakeplace.,KrosznerandRajan1994).AnumberofeconomistsandpolicymakershavearguedthatsincetherationalesforGlass-SteagallActdonotappeartobejustified,itshouldberepealed.SupportforrepealisgrowingintheFederalReserveBoardandtheOfficeoftheComptrolleroftheCurrency(seeGreenspan1988andBenston1990).
Thepolicyfocushasbeguntoshiftawayfromthemeritsofablanketprohibitionontheunderwritingofcorporatesecuritiesbycommercialbankstodebatinghowtostructureunderwritingactivitiesbycommercialbankssuchthatthepotentialforconflictsofinterestandmisuseofpublictrustisminimized.Concernsabout"conflictsofinterestandlossofpublicconfidence"haveledtheregulatorstorequireextensive"firewall"separationstoprovide"aninsulatingframework"betweenacommercialbankanditssecuritiesactivities(Greenspan1988).
CommercialbanksintheUnitedStates,beforetheGlassSteagallAct,underwroteboththroughseparatelycapitalizedaffiliatesandthroughin-housedepartments.Weanalyzetheconsequencesoftheorganizationalstructurechosenbythecommercialbanksfortheirsecuritiesbusinesses.Morespecifically,weexaminehowtherelativeindependenceofthesecuritiesandcommerciallendingbusinessesofdifferentbanksaffectsthetypesofsecuritiesandcompaniestheyunderwrite,thewaythemarketpricesthesecurities,andthesubsequentperformanceoftheissues.
Wefindthatfirewallsappeartohavebeenvaluableinenhancinganunderwriter'scredibilityinthemarket.Ourresultssuggestthatthecostofunderwritingsecuritiesin-houseratherthanthroughanarm'slengthaffiliateisthattheissuepriceisdiscountedbyamarketconcernedaboutpotentialconflictsofinterest.Thiseffectseemstooutweighthepotentialformoreinformedcertificationwherebyin-housesecuritiesdepartmentsusetheireasieraccesstoinformationaboutafirm'sprospectstoidentifyandcertify"jewelsintherough."Eventhoughwedofindtheorganizationalsegregationofunderwritingandlendingactivitiesincreasedtheabilityofunderwriterstocertifyfirmstothemarket,wefindthatmarketpressures,andnotregulation,ledtotheadoptionofsomeformoffirewalls.Duringoursampleperiod,theorganizationofsecuritiesactivitiesinaseparateaffiliaterapidlybecamethedominantformforcommercialbanksandtruststhatwereleadunderwritersandsyndicatemanagers.
II.OrganizationalStructuresofCommercialBankInvolvementintheSecuritiesBusinessbeforetheGlass-SteagallAct
Toinvestigatetheconsequencesofthedifferentorganizationalforms,thatis,theextentofthefirewallseparations,wewillcontrastthetypesofunderwritingactivitiesandtheperformanceoftheunderwrittensecuritiesacrossthetwomainorganizationalstructuresforthecommercialbanks'securitiesbusinesses:
"captive"internalsecuritiesdepartmentsandseparatelycapitalizedandseparatelyincorporatedaffiliates.Theaffiliateswerecharteredunderstatelawsasregularcorporations,freeoftheregulationsassociatedwithbanking.Therewerenominimumcapitalregulations,andsomeaffiliateswereincorporatedwithsmallamountsofcapital(see,.,Peach1941,.Sincetheaffiliatestypicallysharedthenameoftheirparent,affiliatesenjoyedthe"fullbenefitofthegoodwilloftheirparentbanks"(Peach1941,.
Whilemanybankandtrustcompaniesenteredthesecuritiesbusinessduringthe1920s,themovementwasnotuniversal.Somebanksandtrustsarguedthathavinganinternaldepartmentwhichunderwroteanddistributedsecuritiescouldcompromisethe"soundness,integrity,andconservatism"oftheirinvestmentadvice,andsuchinstitutionsproudlyadvertisedthattheydidnothavesuchadepartment(Peach1941,p.72).In1925,forexample,theFarmers'LoanandTrustCompanyofNewYorkannouncedintheCommercialandFinancialChronicle(May2,1925,p.2228):
Duetoourpolicyandfirmconvictionthat,asatrustee,weshouldneverplaceourselvesinthepositionofabuyerandsellerofsecuritiesatthesametime,wehaveneverhadabonddepartment.Ourwholesecuritydepartmentisorganizedfortheimpartialstudyofsecuritiesforthebenefitofourcustomersandnotforthesaleofbondstothepublic.
III.TheoreticalDebates
Politicaldebateonuniversalbankinghasfocused,sincethePecoraCommitteehearingsin1933(seeU.S.Senate,1933-34),ontwomainissues.First,legislatorshavebeenconcernedabouttheadverseeffectsofextendingbankpowersonbankrisktaking.IthasbeenarguedthatthewaveofbankfailuresintheU.S.intheearly1930smayhaveresultedfrombankinvolvementintheexcessivelyriskyunderwritingbusiness(seethediscussioninWhite,1986).Second,conflictsofinterestmayarisewhenabankcombineslendinganddeposittakingwithunderwriting.Ifafirmsuffersanadverseshockwithoutthepublicrealizingit,forexample,acommercialbankmayhaveanincentivetounderwritepublicissuesonbehalfofthefirmandusetheproceedstorepayearlierbankloansmadetothefirm.
Theoretically,however,itisnotclearthatbeforetheGlass-SteagallActbankincentivesweredistortedinsuchawaythatbankswantedtoincreasetheriskinessoftheiractivities.Furthermore,thereisnojustificationforassumingthatunderwritingactivitieswereriskierthanlending.Consistentwiththelackoftheoreticaljustificationfortheargumentthatbankinvolvementinunderwritingleadtoexcessiverisktaking,White(1986)findsthatsecuritiesoperationsofcommercialbanksdidnotimpairtheirstabilitypriortoGlass-Steagall.Banksengagedinthesecuritiesbusinesshadnohigherearningvarianceorlowercapitalratiosthanbankswithoutsuchoperations.Inaddition,thosebankswithsecuritiesoperationswerelesslikelytofail.Although5000banksfailedduringthe1920s,virtuallynonewerethecitybankswhichwerethemostlikelytohavesecuritiesaffiliates(Carosso1970,p.242;seealsoWhite1983).Inthebankcrisesbetween1930and1933,morethanaquarterofallnationalbanksfailedbutlessthan10%ofthosewithlargesecuritiesoperationsclosed(White1986,p.40).
Concerningthesecondissue,Saunders(1985)andBenston(1990)arguethatevenifunderwritersharborconflictsofinterest,rationalinvestorswillnotbesystematicallyfoolediftheyareawareoftheseconflicts.KrosznerandRajan(1994)comparetheperformanceofbondsunderwrittenbytheaffiliatesofcommercialbankswiththoseofindependentinvestmentbanks.Thebondsunderwrittenbycommercialbanksoutperformedsimilarlyratedbondsunderwrittenbyinvestmentbanks.Furthermore,KrosznerandRajanfindthatthedifferenceinperformancewasespeciallypronouncedamongstlowerqualitybondswheretheincentivesandthepotentialforcommercialbankaffiliatestodupethepublicinvestorwouldhavebeenthegreatest.
Whilethetheoryandevidenceimplythatthefocusofpolicyonsafeguardingtheinterestsofthepublicinvestorbyprohibitingbanksfromunderwritingismisplaced,theydonotimplythatconflictsofinterestarecostless.Publicinvestorsrationallywillrequireahigherpromisedyieldfrombankunderwrittenthanforsimilarinvestmentbankunderwrittenissues.Theeffectshouldbemostpronouncedforsmall,lowqualityjuniorissuesunderwrittenbysmall,relativelylesswellknownaffiliates.Wetermthisthe`rationaldiscounting'hypothesis.Thereis,however,analternativehypothesiswhichhascontraryimplications.Banksmayhavebetteraccesstoinformationthroughthelendingprocessthandoindependentinvestmentbanks.Consequently,theymaybebetterabletocertifyfirmstothemarket.Thiswouldimplythat,comparedtoissuesunderwrittenbyaffiliates,investorswoulddiscountissuesunderwrittenbyindependentinvestmentbanksbecausetheseinvestmentbanksarelessinformed.Wetermthisthe`informedcertification'hypothesis.Whicheffectdominates-theinvestors'suspicionthatbanksharborconflictsofinterestorthebettercertificationbecausebankshavebetterinformationand/orenjoyscopeeconomiesingatheringit-isanempiricalquestion.
IV.DataCollectionandSources
WeuseavarietyofcontemporaryandmorerecentsourcestoidentifycommercialbanksengagedininvestmentbankingpriortotheGlass-SteagallAct:
Carosso(1970),Peach(1941),PrestonandFindlay(1930aand1930b),Moore(1934),White(1986),theCommercialandFinancialChronicle(CFC)andtheNationalSecuritiesDealersofNorthAmerica(1929).Tobeincludedinoursample,thebankortrustmustbelistedintheMoody'sBankingManual.Moody'sprovidesinformationoneachbank'sbalancesheetandon
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