Insurance

Dramatic changes in recent decades in the economics of the financial services industry, due largely to the computer revolution, have destroyed the efficacy of traditional financial services regulation. Despite these developments, the federal government has merely tinkered with the current regulatory system. Such tinkering is counterproductive because the current rigid, central planning style of financial services regulation is inherently flawed. Instead, we must create a market driven regulatory model that gives individual bank sand thrifts the flexibility to pursue unique business strategies.

The percent cross guarantee concept is a reform proposal that would meet his test. Embodiedin legislation introduced in September by Rep. Tom Petri R Wis, its implementation will quickly lead to better priced and therefore wiser bank lending while eliminating the risk federal deposit insurance now poses to taxpayers. Cross guarantees also will end regulatory arbitrage, that is, the fight of lower risk assets from banks and thrifts to less taxed and less regulated channels of financial intermediation.

America would have a safer and more efficient financial system as a result. The Traditional Regulatory Model The traditional regulatory model for depository institutions emerged in the United States during the 19th century. Entry into banldng was restricted and banks and thrifts were highly regulated as to their capital, liquidity, and lending. These regulations were enforced by bank examiners and supervisors under the premise that individual regulation of financial services shows certain characteristics of central planning as it was practiced in the former Soviet Union and in Eastern Europe.

Like central planning, banking regulation focuses on micromanaging individual enterprises, specifically by giving directives to the regulated as to what they must do the Community Reinvestment Act and minimum capital requirements, for example, what they cannot do branch across state lines, underwrite corporate stocks, or broker real estate, and what they are discouraged from doing, such as making limited documentation loans to small businesses. One cannot help but be struck by the fact that federal micromanagement of banks and thrifts has increased exponentially as the rest of the world rapidly sheds socialism and communism.