Money & Banking News

November 2006

Click on these links to read some recent readings related to the textbook Money and Banking: A Policy-Oriented Approach by Dean Croushore.

In this issue:

1. Safe and Sound Banking, 20 Years Later

2. Industrial Loan Companies

3. Official Dollarization and the Banking System in Ecuador and El Salvador

4. Inflation Persistence in an Era of Well-Anchored Inflation Expectations

Safe and Sound Banking, 20 Years Later

As we discussed in Chapter 9, today’s banks are in much better shape than banks were in the mid-1980s, when failures at savings-and-loan associations, volatile interest rates, and high inflation put banks at great risk. In 1986, the American Bankers Association sponsored a task force in which prominent economists proposed steps to make banking a safer industry. Now, twenty years later, Simon Kwan looks at the proposals made in 1986 and how they stand in 2006. He notes the major changes in the banking system, how it has improved, and where it is still not accomplishing the goals proposed in 1986.

Federal Reserve Bank of San Francisco, Economic Letter, Number 2006-26, October 6, 2006.

Industrial Loan Companies

A loophole in the banking regulations allows firms called “industrial loan companies” to receive FDIC insurance and to make loans without being subject to the rules that govern banks that we discussed in Chapter 9. Industrial loan companies drew public attention in 2006 when Walmart applied to open one, so that it could have direct access to the payments system instead of going through a bank. In this article, Emre Ergungor and James Thomson explain the origins of industrial loan companies and recent proposals to bring them under regulatory scrutiny.

Federal Reserve Bank of Cleveland, Economic Commentary, October 1, 2006.

Official Dollarization and the Banking System in Ecuador and El Salvador

Some countries choose to fix their exchange rates with other countries, as we saw in Chapter 14. An extreme form of fixing the exchange rate is dollarization, in which a country simply uses the U.S. dollar as its currency, instead of having its own independent currency. In 2000, Ecuador adopted the dollar, and in 2001, El Salvador did the same. In this article, Myriam Quispe-Agnoli and Elena Whisler examine how the countries have fared under dollarization. Particularly noticeable has been an improvement in their banking systems.

Federal Reserve Bank of Atlanta, Economic Review, Third Quarter 2006, pp. 55–71.

Inflation Persistence in an Era of Well-Anchored Inflation Expectations

A look at the data on inflation and people’s expectations of inflation shows that inflation expectations have become very stable in the past ten years, and at the same time inflation has become much less persistent than it was before. As we discussed in Chapter 18, stable inflation expectations reflect the credibility of the central bank’s monetary policy. In this article, John Williams explains how inflation persistence can decline as expectations become more stable.

Federal Reserve Bank of San Francisco, Economic Letter, Number 2006-27, October 13, 2006.