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Bank Regulation

In: Business and Management

Submitted By TraciStump
Words 389
Pages 2
A certain amount of regulation in banks is necessary. Without regulation there would not be anything to prevent all kinds of financial crises. This however, does potentially pose a problem of over-regulation. As the government regulates the banking industry they could potentially take this too far but I believe heavy regulation has much less potential for drastic disastrous events to occur than when banks are working with a large amount of deregulation. Examples of problems involving banks are plentiful when it comes to deregulation, for instance, banks would come into trouble when depositors ask for large withdrawals and the banks would not have enough cash to keep up. In these cases before the Federal Reserve System banks would appeal for “bank holidays” where they would close for a time being to catch up and make agreements amongst themselves, which occurred during the Panic of 1907. The Fed was created at that point to hopefully ease the minds of depositors as a reserve bank to loan money to member banks in last resort circumstances and it worked. (Krugman) Other reasons banks need to be heavily regulated is the potential for unethical practices. If banks, for example, begin approving every loan regardless of credit risk this may cause the bank to fail eventually when the loan defaults which has implications on everyone involved including those who have money deposited in the bank that no longer can retrieve this money. This leads to the government having to step in with funds or buyouts which leads to the government losing money and having to deal with the ill practices of that bank. The same could be said if the banks begin making risky and ill-advised investments with the depositors’ money. During the 1920s bank failures averaged over 550 a year and this threatened the collapse of the system. (Gordon) It is events like this that make it necessary for heavily regulated banking systems. As regulation increases the possibility of large crashes such as The Great Depression decrease but there are many downsides as well. This includes political influence and the general lack of freedom of banks affecting how they do business as well as their growth, but overall, the downsides of heavily regulated banks are much less significant than the potential of disaster when banks are left to regulate themselves.

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