Briefing Paper No. 45

Bank Regulation: Will Regulators Catch Up with the Market?

By Randall S. Kroszner
March 12, 1999

Executive Summary

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.

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Randall S. Kroszner is an associate professor of economics in the Graduate School of Business at the University of Chicago.