Evaluating and Controlling the Risks of Financial Product Deregulation

Abstract

The walls separating commercial banks and thrifts from non-bank financial institutions are beginning to show serious cracks. Market forces and rapid advances in technology are impelling both bank and non-bank enterprises to search for loopholes in the highly complex legal framework governing financial organizations in order to expand into new markets and to offer new services. During its first term, the Reagan Administration proposed legislation that would have permitted bank holding companies to offer virtually any financial service through separate non-bank subsidiaries Since 1984, however, Congress has been stalemated on this issue, reflecting both bitter divisions between the various financial interests involved and continued disagreement over the likely effects of financial product deregulation. This article takes advantage of the apparent hiatus in legislative activity to examine the implications of financial product deregulation for the safety of the financial system.