Should the government stop regulating banks, letting the marketplace enforce sound financial practices as in most other businesses?   

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

No, the government should not stop regulating banks.  In your question, you mention that other businesses are left to market forces, implying that banks should be too.  But banks are not like other businesses.  They have a much greater impact on the overall health of the economy than other businesses do.  For example, when banks fail, losing their depositors' money, it hurts depositors who are really not in a position to be able to judge which banks are sound and which are not until it is too late.  If banks are unregulated, too many people can lose their money through no fault of their own.

In general, less regulation is good.  But banks are too important for the economy as a whole to be left completely on their own.

enotechris's profile pic

enotechris | College Teacher | (Level 2) Senior Educator

Posted on

Yes, the government should stop regulating banks.  Like members of any industry, there are good and bad practitioners, and banks are no exception.  Bad ones should be allowed to fail (instead of being considered "too big to fail") and good ones should be allowed to prosper.  The only appropriate mechanism for those allowances is a Free Market.

If depositors place a premium on not losing their money to the bank, because of the bank's risky business practices, they will insist on the bank not making risky investments.  If the banks fail to do so, depositors are free to find another bank that will -- the competition among banks will keep the industry honest. Additionally, if a bank fails to heed the will of investors or depositors, it will not be responding to market forces, and it will go bankrupt, as people take their money elsewhere -- so bad banks will evolve out of the banking system.

What government regulation can do is to make sure that no one bank becomes a monopoly or near monopoly (like BankAmerica) or that fraudulent (not risky!) practices are punished.

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