Background Considerations to a Regulation of the U.S. Financial System: Third Time a Charm? Or Strike Three?
Levy Economics Institute Working Paper No. 557
20 Pages Posted: 25 Apr 2009
Date Written: April 24, 2009
U.S. financial regulation has traditionally made functional and institutional regulation roughly equivalent. However, the gradual shift away from Glass-Steagall and the introduction of the Financial Modernization Act (FMA) generated a disorderly mix of functions and products across institutions, creating regulatory gaps that contributed to the recent crisis. An analysis of this history suggests that a return to regulation by function or product would strengthen regulation. The FMA also made a choice in favor of financial holding companies over universal banks, but without recognizing that both types of structure require specific regulatory regimes. The paper reviews the specific regime that has been used by Germany in regulating its universal banks and suggests that a similar regime adapted to holding companies should be developed.
Keywords: Financial reregulation, Glass-Steagall, Financial Modernization Act, German Universal Bank Regulation, Prudential Regulation
JEL Classification: G21, G28, F33, F36
Suggested Citation: Suggested Citation