BARACK OBAMA'S new plan for the banks is unlikely to achieve his stated
aim that "Never again will the American taxpayer be held hostage by a
bank that is too big to fail." But whether or not the proposed measures
fall short of that ambitious goal, one thing is sure. If the plan is
implemented, it will have unintended consequences. That has been the
history of previous financial reforms.
Take Regulation Q, a rule established by the American authorities in
the 1930s to restrict the interest rate that banks could pay on
deposits. It had several motives, including a desire to boost banks'
profits (and thereby help pay for deposit insurance) and a belief that
competition to pay high deposit rates would encourage banks to take too
many risks. The rule was extended to thrifts (savings-and-loans
institutions) in the 1960s.
With rates held below their natural level, American savers eventually
turned elsewhere. The biggest institutions looked abroad. As dollars
accumulated outside America, the Euromarket, where lenders and
borrowers were free to set rates between them, developed in London.
Small investors moved their savings out of banks and thrifts and into
money-market funds, which did not face a limit on the rates they could
pay. The devisers of Regulation Q did not intend to boost the
money-market fund industry or to prop up London as a global financial
centre but that is the effect they had.
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Thanks reader Tim.
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