In the first post, Chu's test showed in a certain period, the amount of bank failures in free banking is less than that in regulated banking and drew the conclusion of regulation is noneccesary. But can bank failures indicate the banking stability? It is not, in fact, banks failure is normal and it is a process of pushing regulation updating. So Chu's test also cannot support free banking.
Otherwise from that, in 2004, Hickson and Turner analyzed the deficiencies of free banking from other directions, which further defences the necessary of banking regulation.
First of all, they mentioned time-inconsistency
problem. Since there is competitive market in free banking, banks are more
difficult to regulate, therefore, depositors would never really know the value
of loan portfolio and finally, the time-inconsistency problem was generated.
Moreover, this asymmetric information problem also gives incentive of banks to
over-issue liabilities. Even though, there was a limited liability system
during free banking time, but that failed to reduce over-issue problem and
cause more risky investment.
Another idea of Hickson and Turner, at the time of
free banking, the liability ownership was limited, which helped to prevent
banking stability. But in this case, it seems that banks are under regulated
instead of free banking.
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