Commercial Bank Instability

In early 2001, a colleague of mine expressed concern that the deregulation of banking witnessed in the previous ten years would make the U.S. vulnerable to another experience similar to the Great Depression. Between 1929 and 1933, close to 10,000 commercial banks failed, costing depositors millions of dollars. Though my colleague probably did not fear another catastrophe of quite that magnitude, he was concerned that instability would follow deregulation. Similarly, students in my classes often conclude that banking systems outside the United States must be more vulnerable to crises and instability because they lack the regulation of U.S. banks. In both cases, my colleague and my students simply assume that regulation preserves or creates stability and prosperity. They are not alone. Many scholars of banking contend that periods of stability and prosperity are rooted in public policy decisions regarding the regulation and supervision of commercial banking. Indeed, the most recent 2007–2009 financial crisis has been blamed on the very deregulation that my colleague alluded to several years ago. However, it is increasingly difficult to accept the assumption that bank regulation begets bank stability because the U.S. experience clearly suggests otherwise.