Banking deregulation eliminates or simplifies laws for banks, allowing for more self-regulation and individual choice. It is associated with free market economics, but its success varies and is debated due to the risks of the banking industry. The 2008 economic crisis is attributed to the Gramm-Leach-Bliley Act, which eliminated the separation between insurance and investment banking.
Banking deregulation generally refers to the elimination or at least simplification of various laws that apply to banks. Typically, this takes place at the national level and is generally aimed at allowing individual actors, be they individuals, companies or banks, to be more self-regulated and to make more personalized choices about things like interest rates and acceptable payments. Perhaps the practice is most enthusiastically supported by free-market advocates, who often push for a society in which individual choice rather than government mandate informs action. These proponents emphasize minimal, if any, interference by government in the private sector. The banking industry is generally a high-risk environment, especially when you consider things like national treasuries and big industry capital. The success of the banking sector is generally seen as vital to the economic success of a country or region more generally, and as such it is often a sector that government regulators want to control, even if only tangentially. Even in all or most unregulated situations, it is important to realize that some laws still apply, particularly those related to fraud and other criminal practices. Typically, it is only those regulating more discretionary policies that are suspended.
Understanding Agency Regulation Generally
Most governments regulate many, if not most, areas of commerce in their societies, and these regulations usually come in the form of laws. Laws set rules and boundaries and create broad parameters for actions that are and are not permissible. Banking and money management is often a highly regulated area for many reasons, but the associated risks certainly top the list.
In most cases, the main reasons for bank regulation are well-founded and well-intentioned. Depending on the circumstances, however, they are often criticized for being overly restrictive and hampering the possibility of innovation, among other things. The deregulation movement was born in large part out of a desire for a less restricted market. As deregulation takes place, its scope and limits can vary tremendously from place to place. Much depends on the overarching legal structure of society in general, as well as the size and scope of the banking sector more specifically.
Relationship with the free market economy
Banking deregulation is closely associated with the free market economy. The core concept of free market economics is that limited government involvement in the market will allow the market to settle into an ideal state. Similarly, advocates of deregulation believe that regulatory oversight stifles competition in the banking industry. According to this idea, competition will be economically beneficial for individual banks and consumers in general. In theory, banks will be forced to offer the best deals to potential customers and manage their business efficiently and effectively in order to stay in business.
The concept of the free market is highly associated with one of its greatest champions in history – the Scottish economist Adam Smith. One of his most famous terms is “the invisible hand”, which refers to the concept that no regulation really has a hand, albeit an invisible one, in directing the market towards an ideal state.
Normal fluctuations in politics
The success of deregulation also tends to vary, and may vary depending on other external forces. For example, banking regulation in the United States leading up to the Great Depression was minimal. After the economic collapse of 1929, however, the government increased regulation and even created an independent agency – the Federal Deposit Insurance Corporation (FDIC) – to oversee banking processes. The economic meltdown was partly seen as the result of an artificially inflated market caused by unregulated banks using underwritten shares.
From the 1980s, there was a general movement towards bank deregulation. Largely attributed to the Regan administration’s economic focus on free market principles, this shift to deregulation culminated in the Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Act (GBLA), also known as the Modernization Act of Financial Services in 1999, allowed banks more freedom in their economic practices and led to the elimination of the traditional separation between insurance and investment banking. Some analysts trace the 2008 economic crisis and the failure of several US banks to the GBLA.
ongoing debate
Around the world, debates on bank deregulation are ongoing. Experts who believe in the infallibility of the market suggest that any regulation eliminates competitiveness, which limits economic growth. Economists and financial experts who support banking regulation continue to cite historical economic meltdowns resulting from an unregulated free market and the endless greed of the corporate sector.
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