Legislation on financial services modernization has taken on special urgency since the banking industry is transforming itself through mergers stretching across financial services and across countries. Phil Gramm (R-Tex.), the new chairman of the Senate Banking Committee, has made bank regulatory reform his “number-one priority.” A review of historical and contemporary evidence shows how market forces can address concerns about consumer protection and the soundness of the financial system. The financial services modernization legislation thus should
- repeal the 1933 Glass-Steagall Act and reform the 1956 Bank Holding Company Act,
- allow banks to structure their new activities through operating subsidiaries or affiliates,
- reduce the “moral hazard” of federal deposit insurance by mimicking private bond covenants, and
- not raise any new regulatory barriers.