Saravanan Panneervel PCA 540‐01 (TTH) Argumentative Essay Draft 1 (12th Sep. 2012)

An Ideal Situation: ’ Free Enterprise System Along With Regulated Banking’ The U.S. economy is a free enterprise system which means each individual is entitled to earn profits, own private property, compete in a market place for business and make economic decisions for themselves. In such a system some people argue that regulation of economy and economy driving entities, such as banks, may affect the U.S. free enterprise system. Henry Davis Thoreau, an influential figure in American thought and literature and a proponent of laissez faire, said: “That government is best which governs least; and I should like to see it acted up to more rapidly and systematically. Carried out, it finally amounts to this, which also I believe—‘That government is best which governs not at all’; and when men are prepared for it, that will be the kind of government.” If we speak of banks in the context of regulation or deregulation, I feel that regulation of an economic entity like a bank would not only protect depositors but also secure national monetary stability, preserve an efficient and competitive financial system and protect consumer interests. Businesses and individuals hold a significant portion of their funds in banks and use banks primarily for carrying out financial transactions and issuing and realizing cheques. For conducting such transactions they must maintain a deposit with a bank. Although partial safety of each deposit account is provided through cash and balances in the federal reserve. Part security of a deposit also depends on the banks capital and condition and value of its loans and assets. Banks can use its deposits to provide loans which at the end may not realize cash for banks leading to loss of deposits of the customers. To prevent such situations, regulations on maintenance of adequate capital, Deposit insurance and lending and investment restrictions are imposed. Considering that a vast volume of transactions are conducted every day by individuals and businesses, a safe and acceptable mean of payments is critical to the safety of the customers money and health of national economy. Regulations provide a stable framework and safe channel for making payments. When banks lend money they need to ensure that they have mitigated the risks of lending the money of their depositors. If the money is not returned the bank will be in debt of the depositor which will lead to a monetary imbalance in the system. Therefore the government has regulations and credit check systems in place so the depositors money is safe when banks lend money and stability is maintained in the interest of the nation. Banking regulations are necessary to give opportunities to mid and small size banks to grow in a competitive environment and prevent monopolization by large size banks. It is also necessary that the regulations should not needlessly restrict activities of

Saravanan Panneervel PCA 540‐01 (TTH) Argumentative Essay Draft 1 (12th Sep. 2012)

commercial banks resulting in a competitive disadvantage. Such regulations would be adaptive to situation based economic conditions. In case of a laissez faire mindset a bank with an added advantage will work towards monopolization since profits are the sole objective of a business entity and there would be no regulatory body to encourage competition. Since banking activities have become a vital part of daily life the most important reason why banks should be regulated is for consumer protection. It would defy all logic if banks were not liable to have terms and conditions for deposits made in the banks and consumer would always stay in fear of what is happening to their money. Therefore the banks are regulated and mandated to provide disclosure of deposit and credit terms. Such disclosure will give consumer knowledge and a basis to making choices between different financial institutions offering a competitive advantage. Apart from disclosure of terms and conditions there are many regulations that maintain consumer interests such as financial privacy and reporting of personal credit histories. I consider myself to be a consumer of products banks have to offer and it is in my best interest, as a consumer, that banks be regulated for the safety of my hard earned money. As a counter opinion, based on the support in the essay, to Thoreau’s opinion I would like to emphasize that “A government that regulates banking activities will not only preserve the free enterprise system but also provide support to growth of all rather than the powerful few.” List of Refernces: 1. Kenneth Spong (2000).“Banking Regulation: Its Purposes,Implementations and Effects.” Division of Supervision and Risk Management Federal Reserve Bank of Kansas City. Retrieved from http://www.kc.frb.org/ 2. Regulation Vs. Deregulation (2012); www.apatheticvoter.com 3. Peter J. Wallison (2006). “Why do we Regulate Banks.” Wall Street Journal. 4. James R. Barth, Jie Gan and Daniel E. Nolle (2009). “Global Banking Regulation & Supervision: What Are the Issues and What Are the Practices?” Nova Science Publishers, Inc.