(BQ) Part 2 book "Money, banking, and financial markets" has contents: Bank regulation, the money supply and interest rates, economic fluctuations, monetary policy, and the financial system, inflation and deflation, policies for economic stability, monetary institutions and strategies, monetary policy and exchange rates, financial crises. | chapter ten Bank Regulation BANK RUNS DEPOSIT INSURANCE MORAL HAZARD AGAIN WHO CAN OPEN A BANK? RESTRICTIONS ON BANK BALANCE SHEETS BANK SUPERVISION CLOSING INSOLVENT BANKS F ederal and state governments regulate the . banking industry heavily. The preceding chapters touch on regulations that require lending in low-income areas and limit the fees banks charge customers. This chapter focuses on the core purpose of bank regulation: to prevent bank failures. Over history, failures have caused devastating losses to bank depositors, the government, and the overall economy. Regulators try to reduce two problems at the root of bank failures. One is the phenomenon of a bank run, in which depositors lose confidence in a bank and make sudden, large withdrawals. The federal government addresses this problem by insuring bank deposits. The second source of failure is a problem of moral hazard: owners and managers of banks may misuse the funds they are given by depositors. To address moral hazard, federal and state governments restrict banking in many ways. Regulators decide who can open a bank, limit the types of assets that banks can hold, and set minimum levels of capital that banks must maintain. Government examiners visit banks regularly to review their activities. If regulators disapprove of a bank’s practices, they can order changes or even force the bank to close. AP/Wide World Photos September 17, 2007: Customers of Northern Rock Bank line up to withdraw money from a branch in York, England, during a run on the bank. Bank run sudden, large withdrawals by depositors who lose confidence in a bank | 285 286 | C H A P T E R 1 0 BANK REGULATION This chapter examines the rationale for bank regulation and surveys current regulations in the United States. Commercial banks and thrift institutions that take deposits and make loans are the most heavily regulated financial institutions
