Commercial Banking and Democracy: The Illusive Quest for Deregulation

Abstract

Government regulation is often necessary, sometimes in heavy doses, for private markets to function effectively. This Article presents three case studies from the banking industry to support this thesis. The first case study, the deregulation of Savings and Loans in the early 1980s, is a good example of how deregulation can produce disastrous results and market failures. The second case study examines an EPA regulation which allows banks to avoid liability when demanding that borrowers comply with environmental laws-a socially optimal result. The third study considers the regulation of deposit insurance. Deposit insurance and its regulation prevents bank runs and panics, inherent problems of depository institutions. in the United States, the most effective regulation of deposit insurance comes at the federal level. It is a system that heavily regulates insured banks. The Federal Deposit Insurance Corporation requires member banks to maintain a minimum level of reserves, regulates bank closure, and sets minimum capital requirements. Deposit insurance represents beneficial government regulation. Taken together, these banking regulation case studies are prime examples of how government regulation is sometimes necessaryfor effective markets.