REGULATION AND DEREGULATION IN BANKING INDUSTRY

The banking industry has been subject to extensive government regulation covering what prices
(that is, interest rates) banks can charge, what activities they can engage in, what risks they can
and cannot take, what capital they must hold, and what locations they can operate in. The most
important rationale for regulation in banking is to address concerns over the safety and stability
of financial institutions, the financial sector as a whole, and the payments system. For example:
mandatory deposit insurance schemes are introduced in order to avoid bank runs; capital
adequacy requirements make sure that banks do not become too much exposed. Therefore,
regulation helps make sure that banks have good management so they don’t make bad
investments or are too risky. Regulation helps to reduce many of the problems that could get a
bank into financial difficulty. This will mean there will be fewer bank failures in the future. But
whilst banks are much safer now than they were a decade ago, we can’t expect that even well-
regulated banks will never fail. So that, regulation of banking has undergone tremendous change
over time from region to region and from country to country.
In contrast, financial deregulation (or liberalization) refers to the implementation of policies that
reduce the restrictions imposed on banks, such as the lifting of restrictions on banks entry, on
permissible activities, and on interest rates. Indeed, financial deregulation that liberalizes bank’s
interest rates, removes activities restrictions and enhances foreign penetration, positively impacts
on cost technology. It appears to be beneficial to banks’ cost performance given the significant
improvement of bank cost efficiency observed in the past decade. There is no doubt that the
choice and diversity of bank products and services available to consumers has increased
markedly since deregulation. Since deregulation, there has been a devolution of decision-making
authority within the large established banks to regional and branch managers. This has enabled
the banks to respond more directly and sensitively to the needs of their customers. Banking
deregulation seems to satisfy the market demands.