Banking deregulation: what is it?

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Banking deregulation typically refers to eliminating or at least simplifying various laws that apply to banks. It normally happens nationwide and is often intended to allow individual actors, whether they be individuals, companies or banks themselves, to be more self-regulatory and make more personalized choices about things like interest rates and acceptable payments. The practice is perhaps wholeheartedly supported by free-market advocates, who often push for a society in which individual choice rather than government mandate informs action. These advocates point to minimal government interference in the private sector, if any. Banking is often a high stakes environment, particularly when considering things like national treasuries and major industry capitals. The success of the banking sector is often seen as vital to the economic success of a country or region at large, and as such it is often a government that industry regulators want to control, if only tangentially. Even in all or mostly deregulated situations, however, it is important to realize that some laws usually still apply, especially those relating to fraud and other criminal practices. Usually it is only those that regulate more discretionary policies that are revoked.

Understanding of agency regulation in general

Most governments regulate many if not most areas of commerce within their societies, and these regulations usually take the form of legislation. Laws establish rules and boundaries and set broad parameters for actions that are or are not permitted. Banking and money management is often a highly regulated area for a variety of reasons, but the associated risks certainly top the list.

In most cases the general rationale for banking regulation is sound and well-intentioned. Depending on the circumstances, however, they are often criticized as overly restrictive and hinder the possibility of innovation, among other things. The deregulation movement was born largely out of a desire for a less restricted market. As deregulation occurs, its extent and limits can vary enormously from place to place. Much depends on the general legal structure of the company 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 free market economics. The main concept of free market economy is that limited government involvement in the market will allow the market to settle into an optimal state. Similarly, proponents of deregulation argue that regulatory oversight stifles competition in the banking sector. According to this idea, competition will be economically beneficial to individual banks and to consumers in general. In theory, banks will be forced to offer the best deals to potential customers and manage their affairs efficiently and effectively in order to stay in business.

The free market concept is strongly associated with one of its greatest advocates 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 actually has a hand, albeit an invisible one, in directing the market to an optimal state.

Normal fluctuations in politics

The success of deregulation also often varies 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 1929 economic crash, however, the government increased regulation and even created an independent agency – the Federal Deposit Insurance Corporation (FDIC) – to oversee banking processes. The economic collapse was partly seen as stemming from an artificially inflated market caused by unregulated banks using underwritten stock.

Beginning in the 1980s, there was a general move away from banking deregulation. Largely attributed to the Reagan administration’s economic focus on free-market principles, this move toward deregulation culminated in the Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Act (GBLA), also known as Financial Services Modernization Act of 1999, has allowed banks to have more freedom in their economic practices and has led to the elimination of the traditional separation between bank insurance and investment banking. Some analysts trace the 2008 economic downturn and the failure of various US banks to the GBLA.

Discussion in progress

Debates about banking deregulation are ongoing around the world. Experts who believe in the infallibility of the market suggest that any regulation eliminates competitiveness, which in turn limits economic growth. Economists and financial experts who support banking regulation continue to refer to historical economic collapses resulting from an unregulated free market and the endless greed of the corporate sector.

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