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Why are most banks so closely regulated? A number of reasons for this heavy burden of government supervision have been offered over the years, some of them centuries old. First, banks are among the leading repositories of the public's savings— especially the savings of individuals and families. Many savers lack the financial expertise and depth of information to correctly evaluate the riskiness of a bank. Therefore, regulatory agencies are charged with the responsibility of gathering all the information needed to assess the fi­nancial condition of banks in order to protect the public against loss.

Cameras and guards patrol bank lobbies to reduce the risk of loss due to theft. Periodic bank examinations and audits are aimed at limiting losses from embezzlement, fraud, or mismanagement. Government agencies stand ready to loan funds to banks faced with unexpected short­falls of spendable reserves. While most of the public's savings are placed in relatively short-term highly liquid deposits with ready access, banks also hold large amounts of long-term savings for retirement in pension programs and Individual Retirement Accounts (IRAs).

The loss of these funds due to bank failure or bank crime would be catastrophic in many cases. Regulation acts as a safeguard against such losses by providing deposit insurance and by periodically examining bank policies and practices in order to promote sound management of the public's funds, while minimizing the volume of claims made against the government's deposit insurance fund. On the other side of the coin, however, although safeguarding the public's savings may justify having a deposit insurance system (preferably, one in which banks creating greater risk for their depositors and for the deposit insurance fund pay higher insurance fees), it is not sufficient by itself to justify the entire basket of modern banking regulations.

Banks are also closely watched because of their power to create money in the form of readily spendable deposits by making loans and invest­ments (extending credit). Moreover, changes in the volume of money creation appear to be closely correlated with economic conditions, es­pecially the creation of jobs and the presence or absence of inflation. However, merely because banks create money which impacts the vitality of the economy, this is not necessarily a valid excuse for regulating banks. As long as central banks can control money supply growth through their policies and operating procedures, the volume of money individual banks create should be of no great concern to the regulatory authorities or to the public.

Banks are also regulated because they provide individuals and insti­tutions with loans which support consumption and investment spend­ing. Regulatory authorities argue that the public has a keen interest in an adequate supply of loans flowing from the banking system. Moreover, discrimination in the granting of credit would represent a significant obstacle to personal well-being and an improved standard of living. This is especially important if access to credit is denied because of age, sex, race, national origin, residential neighborhood, or similar factors. Per­haps, however, discrimination in providing services to the public could be significantly reduced or eliminated simply by promoting more com­petition among banks and other providers of financial services, such as by vigorous enforcement of the antitrust laws, rather than through reg­ulation.

1.Why are regulatory agencies charged with the responsibility of gathering the information needed to assess the financial condition of banks?

2.What are periodic bank examinations and audits aimed at?

3.What is regulation aimed at?

4.What are other reasons of bank regulation?