Reference no: EM132815556

OVERVIEW: If banking were not regulated to any greater extent than, say, retail grocery stores, our banking system would operate a great deal differently than it does. Banks could be formed and liquidated with minimal limitations on their entry and exit from the banking market. Inefficient and superfluous banks would go out of business. Competition would determine the prices and availability of banking services. Bank would also operate without geographic or portfolio restrictions, making them free to open branches where they please and borrow and invest as they please. Capital structure would be the prerogative of the management. But banks are not allowed to operate with such freedom. The scope and nature of banking activities are regulated.

Problem 1: If risk-taking is a precondition of a growing economy, and if banks themselves exist because they are willing to take on and manage risk, then bank regulation does not matter. But it does, why? Why don't banks just look after themselves? What is so special about banks? What are the objectives of regulating banks? What are the costs and benefits of such regulation? When regulations pose a threat to the banking industry and the economy?