The recent banking crises experienced in the United States has had a profound impact on the way in which regulation and banking in the modern era has been approached. This study will examine the positive and negative aspects of the prospect of more governmental regulation on the banking industry with a focus on evaluation of the best overall applications. With the ability to look back and assess policy, this essay will produce a credible examination of the fundamental weak points in the existing system.
Beginning with an overview of the regulation environment prior to the banking crisis in the United States will allow a clear illustration of the policy that was in place at the time of the event. Following this section with an assessment of modern policy will reveal to what extent current regulation has had an impact on the reemergence of the banking industry. Finally, the combination of the first segments will enable a clear demonstration of the strengths and weaknesses of the current approach with a reasonable recommendation for future action.
In the end, this essay will have examined past practice, modern implementation and future potential with the stated goal of determining whether the best course is more or less government regulation in the banking sector.
Banking Crisis
DeYoung and Torna (2013) argue that much of the banking crisis experienced in the United States was a direct result of the unusual banking activities that were considered common practice. The regulatory environment in 2007, under the Republican President Bush, was largely a deregulated arena. As illustrated by the failure of the deregulation effort in the 1980’s with the Savings and Loans there is a core environment that serves to create and then propel banking industry crisis (Macey, 2006). Using the areas of deposit insurance and environmental protection regulations, Macey (2006) ably demonstrates past instances in which the entire industry was served in a beneficial fashion by the presence of a strong regulator. Strahan (2003) continues on to argue that his research concluded that volatility in the market would be likely outcome with the removal of regulation. The removal of this protection, often times due to a political shift, allows the larger corporations to make the most of the situation in a dubious and questionable manner.
The banking crisis that began in 2007 had the presence of ready funds, and included activities such as insurance sales and securities brokers that served to propel the banking industry to new levels of financial gain (DeYoung and Torna, 2013). Lacking strong governmental regulatory presence, new methods of increasing revenue that included risky prospects such as venture capital banking and the securitization of assets in the subprime mortgage marketplace were created, further worsening the eventual consequences.
Throughout the previous generations, there had been a strong set of limitations on the banks and their abilities to conduct business outside of the basic lending arena (Strahan, 2003). The recognition by the lawmakers for the potential for abuse was reflected in the copious amount of regulation produced over a succession of Congresses. Ranking high among the regulations that were deemed to be past use was the restriction of the banks to one state, there could be no cross state banking industry, thereby profoundly limiting the overall growth potential for each of these institutions.
Deregulation of the banks during the push of 1970’s entirely changed the industry which had been largely the same since the 1930’s (Strahan, 2003). The fundamental purpose of the regulations at the point of crisis was balanced in the favor of the banking industry in their overall quest to continue to produce high earnings. The results of the experience have led many professionals to question the efficacy of the initial effort to ease the restrictions, illustrating the devastating impact of the worldwide recession as a common sense reason to provide a strong regulatory platform (DeYoung and Torna, 2013).
Modern Practice
Alongside the recognition that the modern system needed to be adjusted is the call to increase the overall regulatory presence by the government in the banking sector. Utilizing the power of the government with instruments that include the Dodd-Frank regulation, the fundamental presence of a strong guideline has been established (Lodge, 2011). However, the implementation of the law has not been without criticism, with arguments of overregulation, overreach and lower revenue streams becoming a common complaint among the impacted industries.
Among the weaknesses of the previous system addressed by the modern regulation were the increase of a Federal Deposit Insurance Coverage from 100,000 to 250,000 (Lodge, 2011). Alongside additional insurance coverage for the demand deposit accounts and internal control exemptions for the smaller banks, many of the problematic issues were addressed. However, the good element s was argued to be limited by the associated questionable elements that were deemed necessary for a successful modern marketplace (Lodge, 2011).
A example of the debate surrounding the implementation of these policies is the limit of interchange transaction fees, a prime area for revenue on the part of the banks has been curtailed. This approach is argued to be detrimental to the fundamental practices of the bank, in effect, hurting the institutions ability to raise funds (Lodge, 2011). Next to regulations that demand that banks keep fiver per cent of the mortgage risk on hand, the ability for many of the smaller banks to keep up with the larger better funded institutions will be hindered. There is a concern that there will come a point that many of the smaller banks will fail, lessening the lending opportunities (Lodge, 2011).
Future Potential
Cole and White (2011) demonstrate in the body of their research that the banking crisis was brought about by a similar set of circumstances as the troubles that came before between the years 1985 and 1992. The recognition of the fact that the removal of regulation spurs economic activity is a positive element, yet as this crisis has aptly illustrated there must be a guiding principle involved to curb abuse. Future creation of a subprime market, largely deemed toxic in retrospect will be curtailed as the 2007 experience has shown that the lack of ethical and responsible investment patterns will yield neither stability or revenue.
With a demonstrated recognition of the value of balanced and considered legislation, the United States has taken steps that have the potential to build a strong and fair foundation for banking practice (Cole and White, 2011). However, this result can be tempered through the change of political power or perspective.
In Conclusion
The Banking Crisis of 2007 has had a profound impact on the manner in which the United States banking industry has been regulated. Alongside the realization that some guidance is required in order to prevent abuse, the absence of this legislation has resulted in the decimation of the American financial system on more than one occasion. While the need to regulate is clear, the presented evidence illustrates the need to not bind the hands of industry to such an extent that they cannot compete in a highly volatile market.
In the end, the results of this study illustrate strong support for a method of measured regulation in the Banking industry. It will be the combination of ethical action and economic innovation that serve to propel the entire industry into the next era.
References
Cole, R. and White, L. (2011). Deja Vu all over again: The causes of U.S. Commercial Bank Failures this time around.. Springer Science and Business, 1 (1), pp. 1-5.
Deyoung, R. and Torna, G. (2013). Nontraditional banking activities and bank failures during the financial crisis. Journal of Financial intermediation, 22 (3), pp. 397-421.
Lodge, M. (2011). The Good, the Bad and the Uncertain of Dodd-Frank. Bank Investment Consultant, 1 (1), pp. 1-3.
Macey, J. (2006). Commercial Banking and Democracy: The Illusive Quest for Deregulation. Yale law School, 1 (1), pp. 1-5.
Strahan, P. (2003). The Real Effects of U.S. Banking Deregulation. Federal Reserve Bank of St. Louis Review, 85 (4), pp. 111-128.
