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Bank regulation: asking the right questions

  • Thomas M. Hoenig
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    If we are to modernize our regulatory system and allow banks the flexibility to adapt to financial change, it is essential that we ask the right questions about the purposes of bank regulation. Currently, much of the regulatory debate focuses on the age-old question: Where do we draw the line between banks and other financial and nonfinancial institutions? As important as this question is, however, it begs a more fundamental question: Why do we regulate banks differently than other institutions? Unless we can answer this basic question, it is possible that we may never achieve consensus on fundamental reform and will continue to rely on an incremental, reactive approach to bank regulation.> In an article based on comments made at the 1996 Federal Reserve/Deloitte Touch Banking Symposium in Houston, Mr. Hoenig suggests that we need to look beyond traditional arguments for bank regulation that focus on protection of bank depositors and the federal safety net. In his view, a compelling reason for bank regulation is to maintain the integrity of the payments system. Focusing on the payments system provides us with insight into two aspects of the current debate over bank regulation. First, the payments system gives us a clear rationale for drawing lines between banks and other financial institutions. Second, focusing on the payments system may provide new ideas on how we should regulate banks as we move into the next century.

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    File URL: http://www.kansascityfed.org/publicat/econrev/pdf/1q97hoen.pdf
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    Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.

    Volume (Year): (1997)
    Issue (Month): Q I ()
    Pages: 5-10

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    Handle: RePEc:fip:fedker:y:1997:i:qi:p:5-10:n:v.82no,1
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