Bank of America Class Action Lawsuit News – 2/1/2012 : Banks have become essential to the economic life of every modern society. A successful banking system has not only become crucial for the functioning of every business, it has also become central to the daily routine of most people. While the possession and use of a bank account still remained limited to the better off four or five decades ago, it has now become impossible to participate in the economic life of most industrialized societies without a bank account. Today, most people have a bank account with which they receive their salary, pay their bills, and invest their savings. This is particularly the case in modern, democratic, and industrialized nations—but not only there. As a result, the security of bank deposits has become a matter of great political and economic importance, with governments doing their best to ensure their security.
Often much deeper impact than the failure of firms belonging to other sectors of the economy. While the bankruptcy of a company normally benefits other companies in the same industry by giving them an opportunity to take over its customer base, the collapse of a bank can seriously damage its competitors. The constant flow of capital from financial institution to financial institution has created a high level of interdependence within the finance and banking sectors. A bank unable to live up to its financial commitments can therefore cause serious difficulties and disruption for the rest of its industry. Moreover, the reaction of a wider public often unable to differentiate between “good” and “bad” banks to a major bank collapse or banking scandal can lead to a so-called “bank run”. Such a massive withdrawal of money from accounts by normal consumers is likely to have knock-on effects on “healthy” banks, since the liquidation of an “unhealthy” bank’s assets and liabilities (a process which in itself can incur heavy losses) is neither a quick nor an easy process.
Economic theorists have recognized both the special position of the banking industry and the need to treat the problems banks face differently from those of other parts of the economy.Of particular interest to economists have been those aspects of banking policy involving access to information and institutional change. Banks can only play their crucial role as financial intermediaries if they enjoy the trust of their depositors. However, depositors have normally found it very difficult and often prohibitively expensive to acquire detailed information about the quality, solvency, and reliability of the assets of any bank. This has led to a relationship between banks and depositors shaped by what has become known as “asymmetric information”: a situation where the former has considerably more information about the creditworthiness of the latter than the latter has of the former. Such asymmetry is particularly strong when it comes to the position of less well-informed consumers of deposit banking services.
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In economic theory, state regulation of the banking sector has been justified by the need to prevent such external events from damaging banks and minimizing the effects a major banking crisis can have on the wider economy (Benston and Kaufman 1996). The need to maintain a competitive and stable economic market has also been used as an argument in support of state regulation of the banking sector (Goodhart et al. 1998: 4-9; OECD 1992: 31ff.). Yet controversy has continued to rage between economists over issues involving bank regulation. One of the main reasons for this recurring debate is the fact that state regulatory agencies supervising the banking sector have failed to prevent banking scandals or bank collapses in several countries. In particular, bank crises in the United States in the 1980s and 1990s4 as well as the Asian financial crisis of 1997 have attracted attention to the costs incurred by state regulation.
Critics of current forms of oversight have also pointed to how regulatory structures can distort financial markets, which often try to anticipate state intervention in the banking industry. Sceptical economists have emphasized the fact that the very existence of state regulatory bodies often hampers competition for customers, thus making it more difficult for individual depositors to find more efficient alternatives to their own banks. Some economic theorists have even recommended that national and international bank regulation systems should either undergo a fundamental process of reform or be entirely dismantled.6 The current system of deposit insurance has come under especially heavy criticism for contributing to “moral hazard” behaviour,7 as it can lower the incentive of banks to monitor the quality of their assets. Deposit insurance can also discourage depositors from gathering informing about the business conduct of their banks which may lead to failing loans and ultimately put the deposit insurance systems under heavy strain.
The manner in which governments have applied these different forms of state intervention varies from country to country. The extent to which these measures are implemented as well as the respective “policy mix” reflects the different political preferences of governments as they have developed over time. This process has resulted in a wide variety of nationally specific bank regulation systems. While macroeconomic factors have dominated the thinking of some governments (particularly as part of a wider Keynesian attempt to exert influence over the transmission mechanisms of monetary policy), in most countries the historical legacy of major banking crises as well as social concerns over the deposits of small investors have shaped banking policy.
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The reorganization of the international financial order after the Second World War had a major impact on these many different forms of bank regulation. Though this was accompanied by much rhetoric about the need for free trade, in reality, most governments did their best to shield their domestic financial markets from external competition. Controls over the movement of capital were used as a tool with which to steer domestic rates of interest. Such an approach was designed to provide the state with the means to both shape the development of its national economy and protect recently established welfare provisions from the risk of capital flight exacerbated by accompanying increases in rates of taxation (Helleiner 1994: 33ff.). While this “post-war settlement” had remained more or less stable during the 1950s.
In the 1980s and 1990s, repeated attempts to modernize the bank regulation system ended in failure despite being declared a key strategic aim by successive American governments. Yet this was not the result of any limitations upon the state’s capacity for action. Rather, the fragmented nature of state authority in the United States paralysed the ability of competing regulatory agencies to monitor and control the banking sector. Their failure was the product of domestic political factors instead of any shifts in the market created by greater international integration. Trying to prevent anything that might damage their own economic or political interests in an extremely complex political environment, an assortment of players hindered further progress by focusing on conflict rather than consensus. This, in short, is the main hypothesis of this case study.
Contrary to popular conceptions of economic life in the United States, American banks operate in a highly regulated business environment. The reasons for this are not just to be found in the depression of the 1930s, which had a traumatic effect on other banking systems as well; they stretch back as far as the late eighteenth century. Stretching back to the founding years of the United States, we find debates about the extent of state intervention in financial institutions and markets. This historical legacy has been a major ideological burden on the political process right up until the end of the twentieth century.
Despite the at times impenetrably complex nature of the bank regulation system, which, under the banners of liberalization, deregulation, and globalization, has undergone a massive process of change in the last few decades, several academics have produced extensive studies of its structures and development. With the work of bank regulators being of equal interest to legal experts, economists, and political scientists, the considerable amount of research work dealing with the state regulation of the banking sector is an indicator of the wider significance of the American case.
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