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Regulations of the commercial banking sector.

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Introduction

REGULATIONS OF THE COMMERCIAL BANKING Introduction Commercial banking has become an essential sector of the modern economy. Although in some small or not enough "advanced" countries it may not be as developed as in others, there is a very small possibility that a country can do without its services completely. In the advanced economies, practically every government department, business organisation, institution and private individual needs, and has, a bank account. This assignment aims to cover some general points about the regulations of the commercial banking. These main points are the reasons why these regulations were implemented, how they were implemented and to what extend they were implemented. Furthermore this assignment will try to explain the role of commercial banking in the market and what the effects of its regulations are. It will explain why the regulations were implemented after the Great Depression and what is their purpose. What is commercial banking? The main functions of modern conventional commercial banks as they exist today include providing what is called current account facilities, money transfer services, and accepting funds into savings accounts. Commercial banking includes 1. granting loans and advances 2. facilitating import-export transactions 3. buying and selling foreign currency 4. discounting and negotiating promissory notes, drafts, bills of exchange and other evidence of debts 5. receiving deposits 6. buying and selling gold or silver bullion 7. ...read more.

Middle

Money Market Mutual Funds (MMMF) are short term investment pools made up of the contributions of many people and invested in the highly liquid end of the market. But the interest rates earned from these short terms investments are passed on to individual fund holders. During that period of time the interest rates were very high, at about 16%-17%. These funds were really attractive because they enabled investors to withdraw funds really easy. They could withdraw funds by writing a cheque on a bank account owned by the Money Market Mutual Funds. These cheques were of fixed denominations. This is a case of regulatory bifurcation. Investors were receiving the interest rates from their deposits with the Money Market Mutual Funds something that was illegal by the Glass-Steagall Act, which will be analyzed below, and these accounts were checkable. That has as a result the beginning of a competition between banks for investor's deposits. . To stem disintermediation from banks, banks have to become more competitive. From 1929 to 1933, the number of US banks declined from about 25,000 to about 14,000 (a 40 percent drop), while the economy went into a deep recession. There were 8000 bank failures and depositors lost faith in the banking system and began the withdrawal of their funds. Many banks were closed for days and weeks at the time to stem the run on banks. ...read more.

Conclusion

balance of payments problem) and to prevent the money stock from declining. Deposit Insurance provided by the Government is highly controversial because there is a moral hazard problem. Banks will become irresponsible and not take due care regarding their asset liability management. Today it has been conceded that Deposit Insurance has eroded market discipline. Edward Kane on the 12 country Basle Agreement of 1988: it is a time wasting placebo whose benefits are oversold. Hidden costs to regulation. There are unacknowledged subsidies that flow from the improper pricing of explicit and implicit government and international financial guarantees. Concealing them from taxpayers may allow such subsidies for burgeon out of control so that their long run effects become destabilizing. Systematic governmental disinformation policies designed to conceal unfunded losses by govt. deposit insurance funds make it hard for taxpayers to fill the disciplinary role that stock holders and creditors play in a private firm. "Ironically, inefficient regulators can and do perversely mine the periodic policy crises they and their predecessors cause for new powers and larger budgets". Conclusion From everything that we have seen above we understand that commercial banking is almost all known banking functions. It is mainly working with money but banks do the same thing in general. Although it did not seem to need any special regulations it was proven that because of this lack of regulations cost to US the Great Depression with catastrophic results. ...read more.

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