It is a well-known fact that financial markets, especially banks, are subject to more developed regulatory mechanisms than other sectors of the economy in order to safeguard the public’s savings, bring stability to the financial system, and prevent abuse of financial service customers. In fact, banks lie at the heart of the world’s financial system and have indispensable functions in business life. In addition, banks play crucial role in the economic life of the nations. The economic performance of the nations, thus, is strongly related to the soundness of their banking systems. Although banks create no new wealth, but their borrowing, lending, and related activities facilitate the process of production, distribution, exchange and consumption of wealth. Consequently, banks are considered as one of the building blocks of the nations’ economic development.
No need to mention that the size, variety and characteristics of financial transactions may produce awfully harmful effects on the entire economic system, which justify the more developed regulatory and supervisory regime of the banks and financial institutions, with the explicit objective of ensuring the soundness and stability of the system. There are countless examples of how weak or incomplete regulatory mechanism of banks and financial institutions has created dramatic financial, economic, and social problems. However, regulation is still an unpleasant word on many people’s eye, especially on managers and stockholders, who often see the rules imposed upon them by the governments as costly, burdensome, and unreasonably damaging to innovation and efficiency. This state of mind with help of some popular concepts of economics and finance, like freedom, efficiency, international competition and economies of scale, gained momentum in 1980’s, and the rules of the game in financial arena rather changed in 1990’s; more and more financial service regulations were set aside or weakened, and free market place, not government dictation, was relied upon to shape and restrain what financial firms could do. A well-known example is the 1999 Gramm-Leach-Bliley Act, also known as Financial Services Modernization Act. This act removed the regulatory walls of the Glass-Steagall Act, which is an important legislation from the Great Depression era that imposed a number of regulations on financial institutions like separating banking from security trading, underwriting and insurance industry.
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* Published in the First Issue of Political Reflection Magazine (PR).