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BANK REGULATION

Will Regulators Catch Up with the Market?

RANDALL S. KROSZNER

BY

No. 45

March 12, 1999

Executive Summary

Legislation on financial services modernization has

taken on special urgency since the banking industry is tran-

sforming itself through mergers stretching across finan-

cial services and across countries.  Phil Gramm (R-Tex.),

the new chairman of the Senate Banking Committee, has made

bank reg-ulatory reform his "number-one priority."  A review

of his-torical and contemporary evidence shows how market

forces can address concerns about consumer protection and

the soun-dness of the financial system.  The financial ser-

vices mod-ernization 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 insur-

ance by mimicking private bond covenants, and

· not raise any new regulatory barriers.

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