Comments on “The Political Lessons of Depression-Era Banking Reform,” by Charles Calomiris at the
“Lessons from the Great Depression for the Making of Economic Policy” conference held at the British
Academy, London, April 16-17, 2010.
1. This paper considers two factors that the author sees as central to the banking distress of the 1930s: (1)
unit banking; (2) central bank adherence to real bills doctrine.
2. There seems to be agreement that the real bills doctrine is a non-issue today, so these comments focus
on unit banking
3. Unit banking. Data on banking density circa 1900 in the US, Australia, Canada, Germany, and the
UK presented, putting US exceptionalism into context.
4. Why has US historically been unit banking? Federal structure. Suspicion of centralization (Bank of
United States, 2BUS, and Fed foundation as examples)
5. Unit banking undoubtedly contributed to banking instability, although other regulatory issues should
be considered (e.g., capital requirements, double liability), especially given their outsized role in
discussions of regulations during the last 20 years (Basel).
6. It is difficult to isolate the precise reasons why branching is beneficial. Is it truly geographic
diversification? Is it because branched banks are larger (economies of scale, can lend to larger
borrowers)? Or does concentration make concerted action easier? These are difficult to disentangle
empirically.
7. Historical evidence. It is clearly not the case that branching guarantees stability: Danat Bank, Banque
national pour le Commerce et l’Industie, Credit Anstalt, and in US, Caldwell and Co and the Bank of
United States.
8. Modern evidence. The Great Depression led to what I call a “financial lockdown”: Glass-Steagall,
regulation Q, and all manner of restrictive regulations, which have gradually fallen in recent years.
Before concluding that these regulations were awful, we should recognize that they were followed by
nearly 35 years of uninterrupted banking stability. I recognize that this lockdown is roughly the
equivalent of setting a 25 mph speed limit on the highway. The proper response is not to remove all
speed limits, but to strike the appropriate balance.
9. Deposit insurance has been positive for banking stability and remains so today. I would further argue
that in its absence, we might have seen banking panics during the recent meltdown.
10. Yet more modern evidence. The following graph displays ROA on banks of less than $1 billion
assets and greater than $1 billion in assets during the last 20 years. Indeed, the larger banks generally
have higher returns, however, during the meltdown, the larger banks ROA fell far more sharply than
smaller banks.
11. Too big to fail. There has been a fair amount of debate over the proper size of banks. This is, of
course, controversial. I don’t propose an answer however, however, disagree with the implied conclusion
that bank size is a non-issue.
1.60%
1.40%
1.20%
1.00%
0.80%
0.60%
0.40%
Under a billion
Over a billion
0.20%
0.00%
-0.20%
Return On Average Assets By Asset Concentration Group
http://www2.fdic.gov/qbp/grtable.asp?rptdate=2009dec&selgr=QCTROA