Need for Elimination of US Bank Regulations - Research Paper Example

Due The debate over the need for or the elimination of bank regulations in the United States has been a heated one in political, economic, and business circles. Although viewpoints run the spectrum between those supporting “free banking,” those that want stricter government regulations, and those that hold middle ground, believing that some regulations are necessary; but they must be reformed and more efficient in comparison to those that currently exist today. The ultimate question becomes could the banking industry be capable and trusted to regulate itself? Many say absolutely; while others say definitely not. It is the intention of this work to outline reliable viewpoints to determine if self regulation is even a feasible contention. It is the overall determination of this research that it is not. Regulation of the banking system is essential. Reforms are certainly called for, but completely “free banking” would be foolish and economically dangerous to the United States. Regulations were initially introduced to unify the banking industry, but, also, to protect the monies of the people and to encourage universal honesty in banking business practices. Today the regulations have been altered, reformed, and added to accommodate the changing times in comparison to the earliest appearances and the opinions about those regulations placed on the banking industry have been heavily debated and will probably continue to be so for a long time to come. There are viewpoints that stretch the entire spectrum of the topic. There are those that believe that there should be absolutely no regulations dedicated to banking. There are those that feel that the regulations need to be stronger and even stricter that they currently are. There are, also, those that remain somewhere in the middle on the issue. They feel some regulations are definitely in order, but are not certain if even more restrictions will actually solve the problems within the banking industry, or just make things much worse. So which viewpoint is right? Can the banking system be self regulated? Will the viewpoints ever find a compromise that result in a solution that is effective and successful? Would anyone feel comfortable depositing their hard earned money in a bank that did not possess FDIC insurance? Without that insurance and the regulations involved your money could become leveraged while the bank takes financial risks. If something goes wrong and that money was lost banks would have little incentive or responsibility to you or that money.("Office of the," 2012) A complete lack of regulations like these would tempt dishonest and risky business practices and no consequences to hold them accountable. “All private for-profit corporations are amoral.”(Driver, 2012) In the article, Bank Troubles Sign of Need for More Regulations, Not Less, D.W. Driver goes on to explain that if it had not been for previous bank regulation interventions then banks would still be engaged in discriminatory lending practices. That said, if banks have exhibited unethical business behavior in the past, why would lessening the regulations today lead to any different behavior. The article pushes for much stronger government regulations and qualified regulators that can guarantee the banks adherence to those regulations. Those in opposition of this viewpoint believe that rules and guidelines are one thing, but the years of new regulations layered upon older regulations, upon older regulations is what is actually damaging the banking industry. The existing regulations are too heavily hindering larger banks, but it is completely crippling the smaller ones.(Killough, 2012) The oldest and most current regulations do not integrate well; there are too many different regulations that are confusing and overwhelming even for the regulators. The reform of the banking regulations would be difficult to construct if we were beginning with a “blank slate,” but reworking what is already present will be no easy accomplishment.(Friedman, 2010) Economically speaking a functioning banking system is essential to a functioning society. This reality has played a huge role in the need for the government to step in. A large amount of research suggests that,”…that banks matter for human welfare, most noticeably banks matter when they fail.”(Levine , 2005) This is abundantly true. If things go wrong with the banks the repercussions for society are sometimes extreme. People panic when banks fail, not to mention the financial ramifications that could be a result. It is the importance of that relationship between banks and fundamental economic welfare that encourages strong policies concerning banking regulations, not just here in the United States, but all over the world. The International Monetary Fund, World Bank, as well as several others, have developed best practice checklists. The Basel Committee of Bank Supervision revised and added to the Basel Capital Accord, originally implemented in 1988. The recommendations come in the form of the three pillars. The first, focuses on more detailed and stern procedures in calculations of “minimum bank capital” requirements. The second pillar pertains to greater authority by regulators to monitor and discipline banks. Lastly, the third pillar, focuses on greater accuracy and clearer transparency in obtained information. Although these “Basel pillars” are controversial and are widely debated more than a hundred countries have admitted that they will likely install, at least, Basel pillar II, into their banking industry.(Levine , 2005) The banking regulation issues have found their way into politics, as well, the 2012 Presidential candidates have been quoted with very different views on the topic. In fact, the commentary from the Republican Party concerning the issue has come under fire recently due to their support of what is perceived as “anti-regulation. Republican Presidential candidate Mitt Romney admits, in an article for CNN, that his political party is often misspeaking when they say that they are for “de-regulation.” This does not mean that they, the Republican political party, wants to dissolve all regulations. Romney explains that there have to be laws and regulations governing the banking industry, they are necessary for a successfully functioning market, “…but you have to make the regulations modern and up-to-date.”(qtd. in Killough, 2012) Current president, Barack Obama, signed the Dodd-Frank bill in 2010 with the intention of, ideally, preventing risky business and a repeat of the “meltdown” of Wall Street that occurred in 2008. However, the legislation has taken too long to implement, presently only a small portion is in effect. Given the opportunity could the banking industry regulate itself? Believe it or not some businessmen are honest and might be able to conduct their banking practices without heavy government intervention or supervision, but that does not apply to all banking corporations, unfortunately. Even the strongest supporters of completely “free banking,” throughout history, have changed their views after experiencing banking failures. Adam Smith, who witnessed the collapse of the Bank of Scotland and the global banking failure of 1772, and Milton Friedman, who saw the effects of the United States banking crisis of the 1930s, both, reformed their views of “free banking,” accepting that some level of regulations should be implemented to avoid economic disasters like these. (Perry & Dell, 2011) If the consciences of the banking corporations is not enough to help them avoid taking unnecessary risks and making unsound business decisions, then the fear of costly consequences and government reprimands may be the only way to attain it. After all,”…businessmen are human-although the lords of finance have a tendency to forget-and they make money-losing mistakes all the time.”(Krugman, 2012) Whether they are intentionally taking poor risks or making unintentional mistakes, neither can be allowed to become common or typical practices. Without proper regulations then it is likely that they would. A recent example is the attention being received by the actions of JP Morgan. As far as is known they used the market for derivatives, rather complex financial instruments, in order to place a large bet on the “safety of corporate debt,” which is similar to what A.I.G. did with concern to the housing debts just a few years ago. Now the bet did not go “bad,” per say, but it very well could have. What is important,” is that institutions playing a key role in the financial system have no business making such bets, least of all when those institutions are backed by taxpayer guarantees.” (Krugman, 2012) Ultimately, having logical, necessary regulations ideally intended to keep the banking industry honest and risk-free is a prudent and feasible approach. These regulations should be constructive, clearly presented, and efficiently implemented, which definitely speaks to the need for reform of current regulations. However, the removal of all regulations and allowing the banking industry to regulate itself would be ludicrous. Banks today play too large a role in the economic welfare of the day-to-day functioning of society to be unregulated; with the weight of that kind of responsibility, they require government regulation to make certain that they do not take advantage of or underestimate that responsibility. References Driver, D. W. (2012, September 7). Bank troubles sign of need for more regulation, not less. Retrieved from http://www.newsleader.com/article/20120906/OPINION/309060034/Bank-troubles-sign-need-more-regulation-not-less?odyssey=nav|head Friedman, J. (2010). Perfect storm of ignorance. CATO Institute: CATO Policy Report, Jan/Feb, Retrieved from http://www.cato.org/pubs/policy_report/v32n1/cpr32n1-1.html Killough, A. (2012, July 26). [Web blog message]. Retrieved from http://politicalticker.blogs.cnn.com/2012/07/26/romney-gop-has-misspoken-on-regulation/ Krugman, P. (2012, May 13). Why we regulate. The New York Times. Retrieved from http://www.nytimes.com/2012/05/14/opinion/krugman-why-we-regulate.html?_r=1 Levine , R. (2005). Bank regulation and supervision. The National Bureau of Economic Research, (Fall), Retrieved from http://www.nber.org/reporter/fall05/levine.html Perry, M. J. & Dell, R. (2011, Feburary 24). More equity, less government: Rethinking bank regulation. The American, Retrieved from http://www.american.com/archive/2011/february/more-equity-less-government-rethinking-bank-regulation US Department of the Treasury, Controller of the Currency Administrator of National Banks. (2012). Office of the controller of the currency. Retrieved from website: http://www.occ.gov/about/what-we-do/mission/index-about.html Read More