Modernizing Banking Regulation

Abstract

The nation's I4,000 commercial banks are unique; they are privately owned profitseeking businesses which also supply us with most of stuff-demand depositsthat we use for money. They also serve other important public purposes: They constitute national payments mechanism, which makes it convenient to use demand deposits as money; they serve as pools of community liquidity, by holding demand and time deposits; and finally, they are largest single source of credit accommodation in economy, by virtue of their ability to create money. It is relationship of commercial banks to nation's monetary system that provides traditional rationale for banking regulation, which aims at safeguarding banking system in its national economic role of principal money supplier. To extent that this purpose is achieved, either by banking regulation or otherwise, banks as payments mechanism and as pools of community liquidity will also be protected. They will not fail, and depositors will not suffer losses. A newer and nontraditional purpose-preserving banking competition-is now also assigned to banking regulation, but this function has emerged only within last decade. It aims to protect not depositing but borrowing segment of economic community, preventing monopolistic exploitation of borrowers by assuring them of existence of an adequate number of alternative sources of credit accommodation. Both propriety of this objective and proper means of achieving it are subject of a current, hotly contested dispute known as the banking competition controversy. We shall first concern ourselves with traditional banking regulation. In this respect, first section of this paper argues that banks are not only unique in their national economic role of money suppliers; they are also unique in sense that, today, heavy overlay of public regulation to which they are subject because they create money is obsolete. The second section then suggests how traditional regulation might be modernized, or streamlined. In third section, new regulatory goal of preserving banking competition is examined, and future of banking regulation is briefly evaluated.