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George Selgin: Government guarantees reduce need for equity cushions in intermediaries

George Selgin: Government guarantees reduce need for equity cushions in intermediaries
Government guarantees reduce equity cushions

George Selgin explains that government guarantees, whether implicit or explicit, act as substitutes for equity cushions from the perspective of creditors.

He adds that intermediaries operating under a government safety-net tend to minimize equity unless compelled to maintain it by mandatory capital requirements.

Selgin has previously argued that the Federal Reserve’s limited intervention between 1929 and 1933 contributed to a falling money multiplier, as detailed in his analysis on the Fed's response to rising reserve ratios. He has also clarified that advocates of fractional reserve banking do not oppose fully backed accounts, addressing this point in a discussion of customer preferences for 100-percent reserve accounts. These statements reflect his ongoing examination of institutional incentives and banking system stability.

This material may contain third-party opinions, none of the data and information on this webpage constitutes investment advice according to our Disclaimer. While we adhere to strict Editorial Integrity, this post may contain references to products from our partners.

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