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This Article presents new approach to the concept of "deregulation" in financial services and particularly banking. Generally regulatory policy is thought to involve more or less straightforward choices between regulation and deregulation. Those most concerned with market failure and equality of outcomes favoring regulation and those with faith in markets and concerns about efficient outcomes favoring deregulation.

This Article shows that government regulation, sometimes in heavy doses, is necessary in order for private markets to function effectively. Consequently, government has in important role to play in fostering markets. The policy choice between de-regulation, continued regulation, and even the initial decision whether to regulate in the first place, all have the political attributes typically attributed to regulation. Namely, these various policy choices a! ll are informed by vigorous lobbying and other forms of rent-seeking. As a consequence, the process by which these policy decisions were reached can tell us a great deal about the likely effects of such choices, both in terms of efficiency and in terms of wealth distribution. Turning to the specific case of banking, the economic and political significance of deposit insurance must be understood. Deposit insurance is part of the fabric of democracy: politicians in a political marketplace characterized by rivalrous competition take ownership of bank failures, and must respond to such failures, either ex ante (before the failure) or ex post (after the failure), by providing assurances to depositors that they will be paid. Thus, in democracies, either de jure deposit insurance, or de facto deposit insurance in the form of post-failure guarantees must be taken into account when evaluating the merits of any proposed efforts to achieve deregulation.

Date of Authorship for this Version

March 2005