Government's Role in Banking Crises Around the World

0:00I'm going to go through and try to tell you a bit of a story based on the data that I have and towards the end I'll focus on essentially the way in which myself and a few colleagues with whom I've been working have tried to assess whether or not government intervention in specific ways somehow enhances the development of financial markets or enhances overall financial stability or not. That's the direction in which I'm headed, but I thought as long as The conference is focusing on Austrian economics and financial markets to start off with a broad base view of the financial systems in different countries. What this does is shows you that there, if you could see everything, that there are lots of countries that obviously each of which has a financial system and the financial systems differ across countries fairly widely.

0:48And I'll make some general points. This is by way of introducing some of the research I've been doing which involves collecting information about financial systems in lots of different countries around the world. It's difficult to do to get information on the exact size and composition of financial systems but I've made some headway in that regard with the cooperation of a few agencies, government international agencies which I'll mention perhaps a little later. This just tells you basically something about the size of the financial system and by that I mean the stock market, the bond market and the banking system. So collectively if you take those three distinct components, you have what one might refer to as a financial system.

1:37Now you might ask yourself, is there some sort of optimal size of the financial system relative to GDP? Are all countries going to converge to the same ratio of the size of the financial system to GDP and does a financial system matter? In that regard, again, just moving on purely quickly, this just shows you in a simple sort of way that, and all you have to realize is that along the vertical axis is GDP per capita, a measure of economic development along the horizontal axis is the size of the financial system, a country's financial system relative and we see there's a positive relationship between these two variables. The translation is basically, the larger the financial system, the more economic development a country experiences on average, so there's this positive correlation between the size of the financial system relative to a country's GDP and its overall level of economic development.

2:37And we know that. And there are rigorous studies that have been sort of attesting to this, what I would call more or less stylized fact. And this just confirms it. Now, when you look at countries, you find that the composition of the financial system of different countries. I didn't pick, as you quickly are able to tell, ideal colors for all these sorts of things, and it would have been much nicer if I had done, I guess, the PowerPoint. With this, you can't, unless you have better eyes and I'm wearing glasses that were recently sort of redone for me. Along the horizontal axis we have different countries. The first country is the United States and the second country is Germany. And again, it's not that I want you to focus so much on the individual countries, but I want you to raise it as diversity.

3:27And what this does is tell you something about the composition of the financial system. I told you something about the overall financial system. Now the composition of the financial system in countries differs. Some countries, banks are fairly important relative to the capital markets, the stock and bond markets. In other countries, it's the reverse. The capital markets, the bond stock markets, are quite important relative to the banking system. And it turns out here, for the first country listed, it's the United States. The U.S., we say, have a capital market-based system. Why is that? Why do people make that statement? statement. Because if you could read everything that's here, you'd find that the first bar chart here, you have a color that appears to be red, then yellow, then blue. It turns out red is the size of the banking system, yellow is the size of the stock market, and the blue is the size of the bond market.

4:25So, it turns out that we have a system in which the capital markets, the bond and stock markets dominate our banking system. If you go to the second country, you see the vertical line there, it's red, that's the size of the banking system for Germany. The bond and stock market, the capital markets are probably small, so people tend to say that Germany has a bank-centered or bank-based financial system. Just the opposite of the United States, so it raises the question, which system is in some sense better? If you were to go to different countries around the world and advocate some sort of reform in their financial systems, you hear all this talk about reforming the financial architecture, perhaps of the world, reforming banking systems, financial systems around the world, which system would you recommend?

5:10And furthermore, it raises the question, if you sent German type economists to recommend changes in the financial system, would they recommend basically a bank-based financial system? Whereas if you sent U.S. type economists, trained economists, would they recommend a capital market-based system? So that's the direction in which I'm sort of headed to deal with those issues. When you look to the right, far to the right, you find Malaysia has a bank-centered financial system. You find Japan does too. The United Kingdom, which isn't here, we say has a capital market-based financial system. If you're trying to jump ahead, there's reason to believe that over time, as countries develop, They should evolve towards a more capital market-based financial system, and I'll come back to that point.

5:55We have the world's broadest, deepest and most liquid capital system of any country in the world. Let me just show you this one I decided to do at the very end. And I'll make a simple point here. On the left is Indonesia. This is basically measuring bank assets relative to bonds and stocks, so the composition of the financial system here is heavily weighted towards bank assets for Indonesia, being the highest, almost 500%. In other words, bank assets five times as great as bonds and stocks in that particular country. And when you go to the far right, you find the United States where it's less than 100%.

6:46So we, again, have a system in which banks are relatively less important, significantly less important than the capital markets. Now, when banks got into trouble in Indonesia, it turns out it cost approximately 80%. It's estimated it cost 80% of their GDP to resolve the banking problems. In the United States, when we had banking problems, it turns out the cost was about 3.5% of GDP, the savings loans in the banks. The point being, if you have a financial system that's heavily bank-centered, or a bank-based system, when banks can do the trouble, it can be quite costly to resolve them, and there can be problems with liquidity and credit getting into that system. and again this sort of suggests that if you look at the cost of resolving banking problems it seems as if there's a positive relationship between the cause of resolving banking problems and whether or not a country has a predominantly bank-based financial system or a capital markets-based financial system.

7:43System. You hear a lot about ownership of crony capitalism and all those sorts of terms being used in Southeast Asia. When Southeast Asia had a major financial crisis or slash banking crisis in mid-1987, most people attribute the origins to Thailand. Some dispute over and so on and so forth. I don't want to get into that now. But here shows you the ownership of the stocks that are out there in the marketplace in these different countries by the nation's 15 richest families. And you can see in some countries, 15 families control over 60% of all stocks in the country. Now, you might, to put that in some perspective, think about The wealthiest individual in the world, Bill Gates, he owns approximately 20% of Microsoft.

8:45So that's 20% of one company, 20% of Microsoft, whose net worth is estimated to be approximately 100 billion, Microsoft's capitalization about 500 billion, but he owns significantly less than 1%, far less than 1% of the value of all stocks in the United States. If you took 15 richest families in the United States, you wouldn't come anywhere near these sorts of numbers. So again, it tells you not only do you have banking-based systems in a lot of these countries, but you also have a concentration of wealth-centered, relatively few families, which gets at the issues of who can control decisions made by top government officials. Now, continuing on and looking at, again, the composition of the financial system, this just, and again, the point of this is not that you, I fully realize that nobody, I assume, not even Bert, they're way in the back and sort of identify each and every country. I can't even standing here. I can't even see some of the countries. The names of the countries

9:54are listed not horizontally but vertically, and it just means that some countries have a fairly, what, a lot of bank assets rolled with GDP, and it goes down very far. Now, what's the point of showing you all these countries? Why not pick two or three? Well, if I went to the trouble of collecting a lot of information from a lot of countries, you're going to have to bear with me, okay? I did the work, and I'm proud of it, so I'm going to show it to you. show to you. No, it's not just that. I do have some shame and I do wish to tell a bit of a story so it's not to impress you that I collected lots of information. This is hard information to obtain, to be quite honest. It's not easy getting information on countries around. And I was doing it through official channels. I had the cooperation of the Office of the Comptroller of Currency and the World Bank to get information. And even then, it's

10:40It's quite difficult, and we've obtained information. Here, there are about 80 countries. Actually, we have information on approximately a hundred, slightly more than a hundred countries around the world. Now, I might ask you if you know how many countries there are today in the world. It's a very difficult question. Those are good answers. Some positive number, you could say, fewer than a million. No, but 193 is roughly, I think, an official number. I wanted to know one so I could tell you. I have 80 countries or 100 countries. You say, well, out of what number? What's the total? Is that a large percentage or a small percentage? So I want to be able to answer that question. and so I call basically the International Monetary Fund and they say, we can tell you how many member countries there are, 182.

11:29I say, fine, 182 out of how many potential members? They said, well, 182, that's the number of member countries. And I said, yes, but out of how many, how many members could you have? If every country became a member, they said, we have 182, we can't answer that question. And you might wonder why it is they have some trouble bringing about appropriate reforms in some countries when they don't know how many there are. Interesting sort of issue. I finally went and I was told at one point I could call the geographer. After calling, I went to the World Bank, I went to the United Nations. We know how many member countries are in the United Nations. So I just called around pretty persistent and I was told there's an official geographer at the US State Department and the official geographer could answer this question.

12:16So I called the official geographer and guess what I was told? The geographer was on vacation. So, one geographer should be roughly, and I know this is exaggerating, about as good as any other geographer, so I called the head of the geographer, I'm at Auburn University, where I teach, and the gentleman said, Jim, that's an extremely complicated question. I thought I was talking to another economist for a second. He didn't ask for a consulting fee, he would tell me or anything, but he told me once I got an answer, The United States are calling back because he'd like to tell his students, and so I do, and I've had occasionally people call me and ask me how many countries are in the world now, but 193 approximately, and on the eve of World War II there were approximately 70, at the turn of the century there were just slightly more than 40, and it's, I don't want to trivialize the issue, but let's move on. So it turns out of the 80 countries, there's wide diversity in the size of the banking system. The United States, 65%

13:19And again, it's an interesting question to ask yourself. Is there an optimal ratio here? Are all countries converging to the same size banking system relative to the size of the economy? Is 65% too high, too low? You know, it's like Goldilocks, too hot, too cold, too high, too low. What's the optimal size banking system? Interesting sort of issue, and you could say let the market decide, and I'm certainly not opposed to that, nd the point is it's not always the marketplace that's determining the size of the banking system. I'll come back to that in a few minutes. So there is diversity around the world. It turns out you might say, does that matter the size of the banking system? Again, if you just simply look at a simple correlation, like I did earlier, you find there's a positive relationship between the size of the banking system and the level of a country's economic development on average.

14:12but actually it turns out we found that this is the same sort of result that we got we looked at the size of the overall financial system it's positively correlated with with the level of country's economic development on average but the banking system is too so that's just gee there is the banking component is pretty important but what happens actually when you next look at and this This is a variation on which I've shown you earlier for more countries. And again, those who have a handout probably can see the country's names, all those sorts of things. This shows you commercial bank total assets relative to equity market capitalization, the size of the banking system relative to the size of the stock market.

14:59And that's along the horizontal axis and along the vertical axis. So one country far to the left has a very big banking system relative to its stock market and then you go all the way down to the United States has a what? As I've told you earlier, a relatively small banking system compared to its stock market. And again, that's consistent with the United States being referred to as a capital markets based financial system. If you go far to the left, you'll find Germany and you find some countries that are probably Less Interesting, BG and those sorts of things. But again, for various reasons that I won't go into here until we move on, I am interested in this sort of diversity. I'd ask you a question, why are these such differences? Is it a result of market forces operating differently in so many different countries, or is it the government sort of intervening and influencing, not only the size of the financial system, but the composition?

15:56composition. And I would argue, and we don't have time today, that it's largely the latter, government's intervening, and they actually importantly influence the shape or the composition of a country's financial system. Again, then you might ask, does it really matter if banks become far more important than, say, capital markets? And here is, again, a simple correlation, and And you find actually there's a slightly negative relationship, which is to say if banks grow relative to the capital markets, in this case the stock market, it turns out that you tend to have a sort of a negative relationship between the ratio of bank assets to equity market capitalization and a country's economic development.

16:43So banks, you might think, can be too important, become too important relative to capital markets, or this component of the capital market, the stock market. And again, if you look at some of the countries that experience major banking problems, you find that they, in many cases, but not always, are not only bank-based, but the cost of dealing with the banking problems and the overall destruction of the economy is quite severe for those countries that are predominantly bank-based. So, this tells us that banking, banks and capital markets are not complements, that one doesn't basically, I'm sorry, not substitutes, one doesn't substitute to the other, they tend to be complements, they go together, rather than banks become important and that can substitute for stock markets.

17:30And the last one I'll sort of show you is, this is commercial bank assets relative to market capitalization and bonds. So it's banks relative to both stocks and bonds. So banks relative to the capital markets. Here, you might wonder why I'm adjusting this, as if you're going to see much more, right? through an appropriate manipulation of this chart. No, you won't still be able to read the names. Fortunately, you can read the United States. If you can't, then obviously you either need glass or need them adjusted. I think that's big enough. That's like the big E that you start off with. And if you can't read the small ones, then you should not rush to have your eyes checked, OK?

18:18So this is the size. In the United States, again, relatively small bank component of the financial system. And then the next one is, let's just see if there's a relationship between, again, we find that there's effectively no relationship between the size of the banking system relative to the capital markets. Suggesting, again, it's these components that operate in unison or as complements to one another with respect to economic development, not that you can have all one and not the other. They sort of work together. You can have too much banking, so to speak, relative to capital market activities. Now, let me just shift gears a little bit and talk a little bit about... I focus a lot on banks.

19:05And it looks like a hill going down here. What you find, this is percent of total commercial bank assets that are privately, domestically owned. In other words, private ownership of bank assets, the United States is very high, 93% of our bank assets are privately owned domestically, the other 7% you shouldn't conclude are government owned, but they're foreign owned basically. New Zealand, strange enough, all the way to the right is New Zealand down at zero, effectively 100% of the banking system in New Zealand is foreign owned. They've outsourced their entire banking system, basically, you know, and that's popular in these days where companies are outsourcing a lot of their activities, they just outsource the banking system, in large part to other countries, including Australia, you perform our banking systems for us, and it's not unlike, you can ask yourself the question, does every country need its own domestically-owned banking system? Does every country need its own currency? I'm sure a lot of you are interested in currency boards, which I guess exist in about 14 countries today. It turns out that

20:09Does every country need its own currency? You can ask the same question. Does every country need its own banking system? And if it's, must it all be domestically owned or not? And you might, let's look at state ownership. And state ownership, we put it here, the U.S., it's actually zero. And you go all the way to the left, you find India, the world's largest democracy, And they have nearly 90% of their banking system's assets are state owned. State ownership of banks is not that uncommon in various parts of the world. You find Poland and Brazil have a heavy concentration of ownership, state ownership of banking system.

20:57Israel's, I see here, just over 40 percent. In Germany, surprisingly enough, Germany is close to 50 percent of the banking system's assets in Germany are state-owned. These are truly, some people use the term, that these are the SOBs of the world, basically, the state-owned banks. It's early in the morning, bear with me, okay, just seeing, this is sort of a wake-up test, you might say, and here's sort of foreign ownership, and it turns out, again, the United States is relatively low, some countries fairly high, some countries it's not a surprise, offshore banking centers, some countries you might say sure, lots of people will locate a bank there, It turns the United Kingdom, strangely enough, the United Kingdom, over 50% of their assets are foreign-owned to the banking system.

21:57Despite the fact that we've all, if you walk the streets of Toronto, you see HSBC, Hong Kong, Shanghai Banking Corporation, it's a London-based, well, London, UK chartered bank operating, a lot of people, as a lot of people know, out of Hong Kong, It's a bank that operates in the second largest number of countries around the world, only after Citigroup operates in more than 90 countries of the world, but it's one of the domestically owned UK banks, but most of the banking system assets are not so. and you can ask yourself, is there an opportunity, Germany, relatively low, Germany is way towards the right, far down below the United States, meaning there's a relatively small percentage of banking system assets in Germany that are foreign.

22:48I haven't mentioned our host country, basically, Canada here. Canada is on every one of these charts, I believe, if you wanted to look and see. If you find, does ownership matter, using my simple sort of correlations here, and you find a slightly positive relationship, a positive relationship between what? A private ownership and the level of a country's economic development. That is to say, on average, countries that have more of the banking system in the hands of the private sector, private sector, doing more of the decisions, despite the regulatory environment which they operate, are associated to More Highly Developed Countries, which tends to fit with my priors.

23:33And then we can look at some concentration. And it turns out in some countries, bank assets are relatively concentrated. This is the largest bank, the largest bank's share of total assets in the U.S. is 60 percent, 6 percent. In other words, our biggest bank accounts for a relatively small portion of assets compared to many other countries. Spinnily, it's great that the large bank accounts for more than 60% of the assets of the banking system. Is there a relationship between banking concentration? And the answer tends to be slightly negative. You can't get too much concentration of banking system assets. It's associated on average again or correlated negatively with a country's level of economic development. I think that just quickly, you might say United States, we have a lot of, this is the number of commercial banks per 10,000 population, we have a lot of banks per 10,000 population compared to a lot of other countries, that's not necessarily a good sign, it has a lot to do with the laws and regulations of this country, it wasn't until 1994 that we got

24:38an easing, a greater easing of the ability of banks to basically operate throughout the country. and some limitations. But nonetheless, our ratio is quite high compared to other countries, largely because of laws of regulation and government intervention in the financial system. And the last one along these lines is basically, you might say, you've talked about the capital market, you've talked about banks, what about non-banks? Again, there's a limited time. So this just shows you non-bank assets. We have a lot of non-commercial bank financial intermediaries compared to lots of other countries. We have, again, the most developed financial system of any country in the world. And when you look, you might say, well, is there any relationship between this particular variable, non-bank assets rather than GDP, and the country's overall level of economic development? And the answer is there is positive correlation.

25:28So if you add this variable, non-bank assets, to sort of banking system assets and capital markets, you get a positive relationship. relationship. It's good for countries, good in quotes, okay? As an economist, I'm trying not to use such words, good or bad, but it turns out that here there's a positive relationship between, you might say, all the different components of the financial system and a country's level of economic development. Let me just sort of shift gears now and say we have had, This doesn't show up too well. What this is is banking problems, in other words, wherever you see some color there, it's countries that have had the darker colors indicate where there have been banking crises, and the lighter colors indicate where there have been no crises, and then the white have, and we know Russia has a banking crisis, but these are specific countries that I've been looking at with some people, and I'll come back to that in a few minutes. We have identified

26:32There have been 106 countries in which 61 of those countries have had really serious banking crises. Crises meaning the capital and the entire banking system has been depleted. And there have been other countries, not on here, another 70 countries in which there have been significant banking problems. And again, depending on terminology and those sorts of things, we haven't sort of included them in our data set here. And you find that these crises have occurred all over the world in all different geographical regions of the world and all income regions of the world. They haven't been restricted, for example, to a particular continent or a particular income level. Another, I'm good at it, you can see sort of using transparency which nobody can read anything, so you probably don't know whether what I'm telling you is actually correct or not.

27:27This is like the good phrase, believe me, trust me, okay? I'm telling you nothing but truth. This is, again, it's not from our purposes for just covering this topic in a general way. This just shows you income. You start at low income, middle income, and then you break it down into upper and lower middle income, and then high income, OECD countries and not, and then you go at different geographical parts of the world. And you see, there have been countries, there are countries that we've examined, In all parts of the world, all income levels, and we find banking crises have occurred in low-income, high-income, western, non-western countries, democracies, non-democracies, you name it, they occur, meaning, in some sense, how can one explain these? Why do they happen in so many different parts of the world? Some might say, well, gee, banking crisis is not uncommon in low-income countries. Maybe there's a lot of purpose. We've had a banking crisis, a banking debacle in the United States. We've had them in other developed countries.

28:56Spain 17%, so they are quite costly to resolve. Ours, as I told you, is about three and a half percent measured in a certain sort of way. Now, you might ask yourself about the IMF. This is, again, not the sort of story I want to get into much today. I'm going to end up with the regulatory side. Here, again, if you connect all these dots, when you connect them all, they effectively spell International Monetary Fund. Every dot represents financial assistance provided by the International Monetary Fund. So the IMF is involved in all sorts of crises, and some might say, well, of course it's involved. It comes in and basically does its duty, has countries reform their systems, and in exchange and it turns out there are 11 countries here, and it turns out there are 32 instances in which IMF has provided assistance.

29:52You do a little bit of arithmetic, but there are a couple of instances where IMF has provided assistance. The first one is the IMF. The second one is the IMF. The third one is the IMF. The fourth one is the IMF. There are 11 countries here, and it turns out there are 32 instances in which IMF has provided assistance. You do a little bit of arithmetic, that means on average each country is getting assistance more than what? Once. I mean, this is basic math. Some of you probably want to reach for a calculator. That's not necessary, okay? What I'm doing is probably straightforward, simple. The IMF, in other words, doesn't go into post-conditionality to have the country forever have to do good things. These countries seem to show up at the doorsteps of IMF all too often, saying, gee, things didn't go right, inexplicable events occurred, we need more financial assistance, and the IMF is in the business, as we know, of writing checks, not drawn from the employee's own

30:53accounts, but the accounts of the individual countries. The credit union once, the IMF credit union and the World Bank credit union, I understand, There's more assets in it than I think it's roughly 80 or 90 countries of the world. You might say there's a good source of funds to tap, obviously the IMF employees would not and then of course they get it back if the countries do good things. Now it's not just the frequency of going to the IMF, it's not just the frequency of going to the IMF, again I apologize, this I would like you to see, but you see that you can This shows you the amount of financial assistance provided to selected countries by the International Monetary Fund.

31:58You notice there are fairly low amounts in the early 80s, but guess what's happening? The IMF is all too eager to have, over time, provided ever larger amounts of financial assistance to ever more countries. So problems aren't going away, if anything we're having more recurring problems and it's more costly to resolve those problems. And you can see here, you can't tell the country, Mexico's high up on the list, receiving lots of the money, Korea, Brazil, Russia, and as we know, some of the money doesn't stay within those countries, it ends up traveling outside the countries. That's I guess some would argue, you know, some people in some cases, well that's what you want, the capital should be mobile, you know, move across borders.

32:46But usually the answer should be yes, if it's your own money, okay, but not money you received a week ago from the IMF. And it turns out that here, the size of the rescue packages is really daunting. This is the rescue packages in East Asia, Russia and Brazil. And let me just tell you how much, if you take IMF, that's the end of the story, then you have multilateral financial assistance, World Bank financial assistance, bilateral, and then the total, I should point out, I guess, that here, the total as a percent of 1997 GDP for these countries, Indonesia, they received assistance of approximately 20 percent, 20 percent of their GDP. Korea is 13.2 percent, Thailand 10.9 percent, Russia 5.1 percent, Brazil 5.2 percent. We've effectively, in some sense, think of banks. For a long time, banks in this country, if they had capital, if it was 5 percent or more of their assets, that wasn't bad. Today, 8 percent. We're recapitalizing If you look at their banking systems, the financial assistance, these rescue packages, as a percentage of the bank assets in those countries, it was 44% in Indonesia.

33:58It was 16% in Korea, 7% in Thailand, 17.2% in Russia, over a thousand banks in Russia, not one of which I would advise you to put your money into. In Brazil, 7.7%. In other words, the cost of these rescue packages is enormous, and this isn't the total cost of resolving the banks. This is not the full iceberg. There's something below the water. So let's not mix apples and oranges. If you look around the world, you might say, what about real estate, it turns out just as in the United States, real estate played a role in our banking problems. Real estate, if you had to identify one factor that's been a common denominator, the most important common denominator of all banking crises around the world, it would be real estate.

34:50with this shows you again I have to tell you my reading of it and the advantage is giving you data because you're all free to do what disagree with me that's the reason I use the data you're able to tell a different sort of story if you wish it might be a silly story to me if it's doesn't coincide exactly with my story but nonetheless you can go around telling silly stories with the data it turns out here real estate prices peaked in some countries in 1990 Japan's real Real Estate, commercial real estate peaked in 1990, and then it started to do what? If it peaked, it had to head where? Down, in 1990. It wasn't, in other words, after a couple of years, you don't say, gee, in 1996, oh, I guess there's a problem in Japan. You don't go to Indonesia, second quarter, third quarter of 1992 and see real estate peak and commercial estate and start going down and say, oh, 97, it's a surprise, banks were in trouble in Indonesia. Looking at some of these countries when real estate, commercial

35:48Real estate prices peak, look at real estate as how important it is to the banks, once it turns down, you know, banks do what, they make loans, loans are used to acquire the real estate, and then the loans are collateralized by what, real estate, when real estate prices plummet, guess what happens to banks, they get into trouble, see, so the IMF knew this, people know these things in advance, nothing was a total surprise, you can look at real estate, you can look for indices to see that there were warnings there that they're bad things, and other things that could indeed happen. It wasn't all Mr. Searles and company people sort of speculating those sorts of things, despite all protestations to the contrary. I don't have...here, I'll skip this one. You saw enough of it anyway, I'm sure.

36:35Okay. That was basically just to show you the exposure, banks were exposed, and a little bit of ownership. in some countries, they wouldn't let foreign banks enter, or there were heavy restrictions. So foreign banks couldn't enter, if foreign banks enter, the less susceptible one would hope to corruption, they would demonstrate good banking practices and it might be a way to prevent some of the bad things that happen in some of these countries. So countries frequently had big problems, they also, countries that had lots of restrictions on which countries could enter and engage in banking activities. I'm almost done, I have, I think, three here now. This one comes back. You might say, why am I showing you these, right? I'm not trying to be cute and I know it's early and it's not because you're still sleeping that you can't read these. Don't want anybody seeking medical attention after this talk. My eyes are terrible. I have a headache. Everything was blurred, my vision. You can drive safely

37:34when you leave here it turns out again this is this is what but I'm showing you what diversity that's what I'm trying to show you like look around this room you can't focus on every face and memorize but you see there's a lot of diversity age sex and so on and so forth so it turns out here there's diversity what is at the top and this gets at this famous question which is what is a bank well a bank is different a different institution in the United States it is in many countries for example, we have low-income, high-income, and middle-income countries here, and we have lots of countries, the three headings, securities activities, securities, insurance, and real estate. What this does, it says, can banks engage in securities activities as part of their mandate? Can banks engage in insurance activities? Can banks engage in real estate activities?

38:24underwrite, develop real estate, sell real estate, and the answer is the first column, I can't show it, to the left under each of the headings is yes, the second is no. The U.S. is, in some respects, many of the research is out of step with many countries around the world, whether it be high-income, middle-income, or low-income countries. It restricts its activities to a greater degree than many other countries in the world. Most countries engage, permit the banks to engage in a wide range of securities activities. They put more restrictions, the most restrictions, on certain types of real estate activities. We see that even a bank is restricted differently in different countries. More restricted here than in other countries, particularly European countries.

39:10Another issue, if you file a banking in any detailed way, those of you here, you know You know, obviously, Congress is considering legislation that effectively is going to define a bank. Say, if you work for a bank, Congress is going to say, now, here are the sorts of activities in which you can gain because you now own a bank and you work for a bank. You don't yet know what the guy is going to permit you to do. Regardless of your skills, training, or anything else, you're waiting for the guy to give you permission to do certain sorts of things, maybe more things you could have done in the back, or they may restrain certain things. They even get involved in the ownership. Who can own a bank? Microsoft, for example, in the United States, can't own a bank without getting out of the business it's currently in, which would be obviously ridiculous.

39:55But it turns out Bill Gates can own a bank. You, you know, see if that makes sense. Again, the logic of the Congress is something that would give you a headache and might prevent you from driving for a while. It turns out that we do have mixing of banks. It occurs in many other countries. Chairman Leach, Chairman of the House Bank Committee, says mixing of banking and commerce doesn't fit our type of democracy. It turns out it fits the types of democracies in many countries around the world and I'll close. I think I'm just about on schedule, right, Lou? I think I'm about...

40:32What's one or two minutes if we round, okay? This is the summary result, so you know I reached the last transparency, which you can't read. Again, just seriously, if you think of the diversity and that when I touch on, now you ask yourself the question, I was going to leave this blank, I would have done a PowerPoint, which is to say, if you look at it this sort of way, you sort of go along the top, we have different, for example, in the far right corner, I'll just tell you, a banking crisis. And along The rows here, and the first, are various restrictions. For example, we have, are banks restricted from engaging in certain types of securities activities, or insurance activities, or real estate activities? Are banks precluded, restricted in some way from owning non-financial firms, vice versa?

41:27And what about state-owned bank assets? Remember I said, what about the percentage of assets owned by the state? That's at the bottom here. Since this is difficult to see, what this tells you basically, and this is based upon some work I've been doing with a fellow named Jerry Caprio at the World Bank and a fellow named Ross Levine at the University of Minnesota, and it relates to some research that I'm presenting at a conference at Harvard at the end of next week, in which basically, what you would like to, if you thought restrictions really are beneficial, is not official. You restrict the activities of banks, you would expect to find in the column, for example, the banking crisis, you'd expect to find negative signs. I'll just tell you this story, you don't have to look at this. What we find is on average, that when you restrict the activities of banks, of firms, these financial firms, you don't lessen the likelihood of banking crisis. In general, and on average, you find that when you engage

42:22In the range of restrictive activities by the government, you increase the likelihood of ______. Restrict the activities of banks, you find that banks are less efficient, not more efficient. So restrictions don't do these positive sorts of things. They don't enhance the stability of a banking system, makes it more fragile. They don't improve the efficient banks. Furthermore, they don't improve the structure of the financial system, make it, for example, more capital Market Base. They don't reduce concentration of the banking system. They don't enhance industrial competition and they don't improve the developments of the financial system more generally in terms of the non-bank sector in the stock market. So they don't have all these beneficial effects. And what we do find is with respect to state ownership, state ownership of banks do have a negative effect. That is what they do is they in state ownership Bank, Increased Banking Efficiency, probably not a surprise to those of you in this room.

43:20They reduce or have an adverse effect on the development of the financial system of a country and they do retard the development of the non-bank, financial intermediary sector and the stock market. So overall, there is some evidence contrary to some people's views that these sorts of restrictions, at least in banks and more generally, don't do the beneficial and all sorts of things that frequently people have been promised. Okay, thank you very much for listening and letting me address you.