What Is Bank Deregulation?
Bank deregulation typically refers to the elimination, or simplification, of various laws that apply to banks. This concept is often promoted by free-market advocates. These proponents stress minimal, if any, interference by the government in the private sector. Usually bank deregulation, however, does not involve the elimination of laws against fraud and other criminal practices.
Bank deregulation is closely associated with free-market economics. The primary concept of free-market economics is that limited governmental involvement in the market will allow the market to settle into an optimal state. Similarly, deregulation advocates believe that regulatory control stifles competition in the banking sector. According to this idea, competition will be economically beneficial to individual banks, and consumer generally. In theory, banks will be forced to offer the best deals to prospective customers, and manage their affairs efficiently and effectively, in order to remain in business.
The free-market concept is highly associated with one of its greatest advocates in history — Scottish economist Adam Smith. One of his most famous terms is "the invisible hand," which refers to the concept that no regulation actually has a hand, albeit invisible, in directing the market to an optimal state.
The success of bank deregulation is debatable. For example, bank regulation leading up to the Great Depression was minimal. After the economic collapse of 1929, the government increased regulation and even created an independent agency — the Federal Deposit Insurance Corporation (FDIC) — to oversee bank processes. The economic collapse was partly seen to have resulted from an artificially inflated market caused by unregulated banks using underwritten stocks.
Beginning in the 1980s, there was a general movement away from bank deregulation. Largely attributed to the Regan administration's economic focus on free-market principles, this shift towards deregulation culminated with the Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Act (GBLA), also known as the Financial Services Modernization Act of 1999, allowed banks to have more freedom in their economc practices, and led to the elimination of the traditional separation between bank insurance and bank investments. Some analysts trace the economic downturn of 2008 and the bankruptcy of various American banks to the GBLA.
The debates over bank deregulation are ongoing. Those experts who believe in the infallibility of the market suggest that any regulation eliminates competitiveness, which in turn limits economic growth. Those economists and financial experts that support bank regulation continue to reference the historical economic collapses that resulted from an unregulated free market and the infinite greed of the business sector.
Written by Klaus Strasser
