How Safe is the Banking System?

HOP 4. How Safe is the Banking System?

Richard Dale

Professor Dale discusses potential sources of structural or systemic weakness in the banking system at three levels. First there is the possibility of major shocks to the system: here the focus is on Third World debt, the pace of financial innovation and the expansion of banks into non-bank, particularly securities, activities. Second, there is the problem of contagion—that is the propensity for banking problems in one area to spread to other areas; and finally Professor Dale discusses the availability of lender of last resort facilities in the event that a major financial disturbance should occur.

Richard Dale is Professor of International Banking and Financial Studies at Heriot-Watt University, Edinburgh, and Editor of the Financial Times Regulation Report. He was previously a full-time consultant to N. M. Rothschild and Sons Ltd and in 1981-1983 held a Rockefeller Foundation International Relations Fellowship at the Brookings Institution, Washington DC. He is a member of the Advisory Council of The David Hume Institute.

The Regularities of Regulation

HOP 3. The Regularities of Regulation

George J Stigler

Professor George Stigler, Nobel Laureate in Economics, was the Institute's first Honorary President for the period 1985-1987. He delivered a Presidential Address on 1st May 1986 at the Conference on Financial Deregulation.

Professor Stigler took an episode in American financial history—the deregulation of the securities market—in order to challenges the view that the influence of opinion determines the growth and scope of legislation. His alternative hypothesis is that 'the propensity to use the state is like the propensity to use coal: we use coal when it is the most efficient resource with which to heat our houses and power our factories. Similarly, we use the state to build our roads or tax our consumers when the state is the most efficient way to reach those goals’. It follows that the deregulation of the securities market is better explained by the influence of changing economic circumstances on the interests of business than by some emergent ideology of deregulation.

Professor Stigler sees a role for economists as predictors of what the effect of economic policies will be and therefore indirectly as predictors of the state's role in regulation. His own prediction is that 'when the economic environment has stabilised for a time, we shall see new regulations serving to shelter the new financial markets that will develop'.