Banking Deregulation

Report Outline
Banking's Structural Changes
Divisions in the System
Aid for Thrift Institutions
Special Focus

Banking's Structural Changes

Deregulation, Mergers, Hybrid Institutions

Major structural changes are taking place in the U.S. banking system, as evidenced by a wave of mergers among financial and quasi-financial institutions, a crisis in the savings and loan industry, the continuing spread of computerized teller and credit card services, and the meteoric growth of money market funds. For decades, the foundations of America's highly compartmentalized banking system have been shaken, as consumers and businesses increasingly have bypassed traditional financial institutions to obtain credit directly from retailers, insurance companies or brokerage houses. In recent years, the partitions in the system have begun to come down, as the various sectors of banking have become much more competitive with one another in going after deposits and the loan business.

Record-high inflation and interest rates have prompted depositors to look harder for the safest possible hedges and the best possible returns. In response, financial institutions have sought to lure customers with all kinds of new services. Commercial banks, for example, have offered checking accounts that pay interest as though they were savings accounts, while brokerage firms have offered mutual funds that can be drawn down as though they were checking accounts.

Bowing to what seems the inevitable, Congress enacted sweeping legislation last year that provides for phased deregulation of interest rates, less protection for certain privileged banking sectors, greater competition among the sectors, and a more comprehensive national system of bank rules. If deregulation continues to be pressed in the coming years, some bank experts believe an integrated national banking system will emerge by the end of this decade and feature a relatively small number of hybrid financial institutions providing a wide range of services to customers in every state of the Union.