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Bank Regulation

Powerful Essays
Bank Regulation

Before the advent of the Federal Deposit Insurance Corporation (FDIC) in 1933 and the general conception of government safety nets, the United States banking industry was quite different than it is today. Depositors assumed substantial default risk and even the slightest changes in consumer confidence could result in complete turmoil within the banking world. In addition, bank managers had almost complete discretion over operations. However, today the financial system is among the most heavily government- regulated sectors of the U.S. economy. This drastic change in public policy resulted directly from the industry’s numerous pre-regulatory failures and major disruptions that produced severe economic and social hardship. Although the regulated United States banking industry has not fallen victim to bank crises since the Great Depression, this relative healthiness of the industry comes only with substantial costs. Many laws and regulations have restricted banking activity, precipitating a relative decline in the importance of the traditional banking sector. In addition, the introduction of money market mutual funds, commercial paper, junk bonds, and securitization into the financial industry created more lucrative alternatives that further reduced the role of traditional banking. In an effort to survive and maintain profitability under the changing economic environment, banks attempted to evade regulation through innovation and a process known as loophole mining. Recently, the same concerns that led governments to regulate domestic banks, such as uncertainty and instability, are pressuring policy makers to harmonize banking regulation internationally, while the limitations and problems encountered by do...

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