Conference – 1991 General Discussion

Wojnilower, Kane and Bisignano

Many of the issues covered in these three papers had been pre-empted by earlier discussions. However, there were still some issues left to be discussed, including convergence of banking systems, the role of information and the usefulness of deposit insurance.

The Bisignano paper led a number of people to ask the question of whether it was possible for two totally separate types of banking system to continue indefinitely. Was there a tendency for convergence to occur? In the United States, there seemed to be some tendency for banks to break out of the constraints imposed by the Glass-Steagall Act. In Germany, although banks had very wide powers, they had the luxury of not having to compete with a well-developed capital market. This would change with the introduction of the EC's Second Banking Directive. Thus, in the United States and elsewhere, banks would inevitably use the power of their distribution systems to expand into newer areas. This would tend to broaden their coverage. In Germany, however, the opposite tendency could arise, as the capital markets, and foreign banks selling capital market-type products, ate into the position of existing German banks.

The aspect of the Kane paper that elicited the most discussion was the emphasis that it gave to banks' valuation of their assets. A number of participants felt that Kane had overstated the potential benefits that could be derived by insisting on frequent “marking to market”. One view was that it was very difficult to “mark to market” if there is no market. With the best will in the world, well-meaning people will still not be able to reach agreement about the value of a particular loan when there is uncertainty over the business prospects of the borrower. The idea of using legal sanctions against bankers who were shown to have overstated the value of their assets did not find much favour. In some circumstances, such as when there was a sharp drop in asset prices or a recession, the value of loans could drop much faster than reasonable valuation methods would indicate. If you were to be penalised for having overstated the value of assets, would there be some equivalent reward for having inadvertently understated them?

This led to a general discussion of the virtues of more information. While more information might seem to be a good thing, more frequent reports could force a shorter term focus and there was a danger of introducing the psychology of the short-term market into areas where it had not been before. Is information better organised in markets or in institutions? Which has the better stability qualities? Perhaps there could be too much short-term information, and the problem would be in its analysis. Some of the people in the group, who had funds management operations, felt that the monthly and quarterly evaluations in that industry had tended to encourage an increase in conformism – a reluctance to depart from the pack, even if economic judgment indicated otherwise.

Some others felt that full disclosure, which would inevitably include bad news from time to time, would work against the interests of small banks. People in doubt would seek the safety of large banks, which they assumed were protected by the “too-big-to-fail” factor. Kane disputed this and said that in the United States some very good small banks would have gained at the expense of large banks under a stricter disclosure and evaluation system.

There was some generally inconclusive discussion of deposit insurance. While some people could see theoretical advantages in its favour, they were not sure that it would provide any more discipline than the present system – the public and possibly the management of very large banks would still be comforted by the “too-big-to-fail” factor. As well, you could never do away with the need for lender of last resort. People would always ask the question “who insures the deposit insurer?”.