Critics of government regulations especially the in the banking system usually argue that they are too costly relative to their (meager) benefits, while proponents of regulatory policies typically claim that the regulations themselves carry great benefits but that the rules may be poorly implemented.

However, the defenders of regulation rarely confront deeper arguments about the actual costs of the policies they propose, and the critics of government regulation rarely make sound economic arguments against them, either out of ignorance or for fear of ruffling the feathers of powerful interest groups or offending the sensibilities of the typical voter.

This article will focus on the negative effect of this financial regulation on the banking system especially in the United States.

• What are the Negative Effects of Government Regulation?
• What Happens if the Banking System Fails?
• What are the Problems Faced by Banks?
• Why do Governments Regulate Banks?
• Do Regulations Hurt the Economy?
• Do Governments Control Banks?

What are the Negative Effects of Government Regulation?

1) Government regulations are a hidden tax on the market

Regulatory compliance costs, learning about and coping with often complex rules, along with whatever direct costs each specific regulation imposes on the targeted firms in the regulated market, merely act as a tax on the affected industry.

Read Also: Are Banking Profits Ethical? If not, Why?

Whether it be product manufacturing regulations, environmental or land-use regulations, labor market regulations, regulations on marketing and advertising, health care mandates, or financial and banking regulations, business firms in the affected industry will view these regulatory expenses merely as another cost of doing business, just as they would a tax.

As any economist will tell you, a tax drives a wedge between supply and demand, leading to higher prices for consumers and lower net revenues to producers in most markets. The only differences between a tax and a regulatory cost are:

a) the tax at least generates some revenue for government, and

b) the tax is typically more transparent and easier to measure relative to regulatory cost burdens, which tend to be hidden; the higher prices paid by consumers are not as easily traced back to their regulatory source.

But, business firms can only respond to regulatory costs in this manner (i.e., passing part of the regulatory expenses forward onto consumers and/or backward onto owners and shareholders), if they can continue to operate and remain profitable.

In many cases, however, the regulations themselves will create a cost hurdle too high for some existing firms to remain in business or for potential firms to enter.

2) Government regulations dull competitive market forces by erecting barriers to entry and forcing marginal firms out of the market

Regulations often act as a suppression on competition, creating monopolistic or quasi-monopolistic outcomes in the affected industries. To the extent that regulations impose costs that lead some firms to exit the market, or discourage entry into the market by entrepreneurial startups, regulations lead to a less competitive marketplace.

The benefits of competition and open markets are well known. In a nutshell, competition imposes market discipline, forces business firms to be accountable to consumers, and incentivizes greater efficiency, lower prices, improved quality, and higher levels of innovation on balance.

Regulations that in any way encourage exit from the market and discourage entry into the market will naturally restrain competition and deprive consumers of those competitive benefits. Regulations almost universally lead to a less competitive marketplace.

In fact, not surprisingly, this is precisely why many firms actually support greater levels of regulation, since regulatory barriers to entry often insulate existing or established firms from competition, giving these firms some monopoly power and lessening their accountability to consumers. This is known as the “capture” theory of regulation as described in argument number three.

3) Government regulations are a form of special interest protection and rent-seeking by the business community

The common perception is that “businesses hate regulation.” But this is a too-simple conclusion and often untrue.

In many circumstances, depending on the size and position of the firms within their industry, businesses crave regulation.

From our earliest history of state and federal regulations beginning in the 1880s, regulations have been about placating the interests of existing firms who feel threatened by new rivals providing lower-priced and more innovative products.

Established firms have at least two responses to such competitive threats: they can improve their products, lower their costs, become more efficient, and compete for head to head with their new rivals.

Or, they can run to the government seeking protection from the competition (either foreign or domestic) by advocating regulations that create barriers to entry, making it more difficult for new rivals to compete on a level playing field.

Examples of the latter tactic abound, including but not limited to product safety regulations, pricing disclosure regulations, mandatory government inspection of products and services, tariff schedules and a variety of import restrictions, and occupational licensing laws in increasingly more professions.

Indeed, managers and owners in existing business firms are often called upon by government officials as “experts” asked to help craft the regulations that will govern their industry, and then grandfathered into these regulations that will apply immediately to new incoming firms.

Such regulations are often marketed and sold to consumers and voters as “consumer protection” against fraudulent or sub-par and unscrupulous businesses.

However, the deeper motivation is in exploiting regulation as a form of “business protection” from competition, limiting entry and insulating existing providers from threats to their market share and pricing power.

The recent restrictions and challenges faced by firms like Uber, Lyft, Airbnb, and countless professional services occupations from veterinarians to morticians to interior designers to manicurists and hair-braiding salons, are all testament to rent-seeking regulatory barriers to entry that favor existing firms while harming consumers, new rivals, and the overall efficiency of the marketplace.

A telling piece of evidence in this argument is that new regulation rarely if ever originate with consumers or consumer groups seeking protection from faulty products or fraudulent services. Instead and inevitably, the support for regulations comes almost exclusively from the business community, and especially from existing firms hoping to impose entry barriers on potential rivals.

4) Government regulations are redundant, since the free market is self-regulating

Some alarmed readers may now be asking, “If government regulations were repealed, or if existing government regulations merely suppress competition with few if any benefits to consumers, then who or what will protect consumers in the marketplace other than the government?”

This is a fair question, and an important one. The answer is as old as the study of economics itself: the self-regulating competitive marketplace, a.k.a., Adam Smith’s “invisible hand.”

The free market, unfettered by the distortions of government regulations and ensconced within the framework of the rule of law and protections for property rights, is a wondrous mechanism of self-regulation and consumer protection like none other.

Products that fail the market test are routinely weeded out, with the assets of the failed firm peacefully transferred into the waiting arms of competing investors and entrepreneurs who have better ideas about their employment. Service providers that fail to deliver the quality promised and sought by consumers will be forced to quickly adapt or liquidate.

Goods and services that appeal to and please consumers will thrive, while those that do not will be rejected and fail, all as long as the competitive forces of discipline, accountability, and efficiency remain in play in a market without regulatory barriers to entry.

If unscrupulous business firms defraud consumers, break contracts, or should their products lead to consumer harm, the rule of law administered through courts and the judicial system stand willing and able to hear the cases of the harmed parties, uphold and enforce contractual obligations, settle disputes, and award damages to victims as appropriate.

As long as markets remain competitive and open to the threat of entrepreneurial entry, consumers will be protected by the combination of market forces and the rule of law upheld by the courts.

Any further layer of government regulation on top of this self-regulating process is not only redundant and unnecessary, but will tend to corrupt and erode the market’s self-regulating nature by throwing costly barriers in the path of competition and innovation.

5) Government regulations threaten the rule of law and violate property rights, often subverting market forces to the arbitrary whims of bureaucratic decision makers

Initially, new government regulations are proposed and crafted in broad scope by political representatives. But, they are then turned over to federal or state government bureaucracies for implementation and enforcement where the details and minutiae are hammered out.

During the implementation and enforcement phases, agency officials are given wide latitude and discretion regarding the details of the regulations, which is why business firms and other interest groups are so keen to influence (or “capture”) the regulatory process for their own gain.

The “how,” “where,” “why,” and “when” of the regulatory details are almost always left up to the exclusive discretion of the government agencies, personnel, and “expert advisors” who will be responsible for their enforcement, often leading to uncertainty and confusion in the marketplace (to say nothing of cronyism), especially during times of high turnover in the executive branch of government.

Entrepreneurship and innovation often become victims of this confusion and uncertainty. After all, if you do not know how or in what manner your enterprise will be regulated and impacted, and what costs you may ultimately be forced to bear as a result of the as-yet unknown or ever-changing nature of regulations, it is better to hold off, keep your powder dry, and avoid risking capital on new investments and ventures for which the potential return may be voided by the changing whims of regulatory interpretation and case law.

This “regime uncertainty” limits entrepreneurial experimentation, R&D investments, innovation, and the normal trial-and-error process of a healthy, open, and dynamic marketplace.

The products and services that do come to be offered in a regulated marketplace are often tailored more toward satisfying political or bureaucratic interests than in serving the ultimate interests of the consuming public.

The engineering and R&D that go into the creation of new products and services are less and less influenced by “consumer sovereignty” and more and more a result of “bureaucratic sovereignty.”

How many of us, in our capacity as consumers, have desired to purchase products (automobiles, home appliances, electronics, furniture and home goods, etc.) that included certain features we desired, but without other features we did not care to pay for, only to be told that such options were prohibited by government regulation and thus unavailable?

You do not want to pay for feature A, and instead want only features B and C, but are not permitted this choice; the government regulations that dictate the manufacture, marketing, and sale of the product forbid it.

This is a clear regulatory violation of property rights, both the property rights of the firm in its ability to manufacture the good according to consumers’ revealed preferences, and a restriction on consumer choice in the types and variety of goods they may purchase.

As such, government regulations often lead to sub-optimal, inefficient, and awkward market outcomes that leave many consumers frustrated. The irony is that these consumers cannot generally trace their frustrations back to the regulatory source, and instead mistakenly blame “capitalism,” “the market,” or “greedy businesses” for their inability to get what they want.

6) Government regulations are rarely subject to thorough cost-benefit analysis (CBA)

From a strictly economic point of view, there are no “good” regulations or “bad” regulations,” per se. There are only those regulations wherein benefits exceed costs, or regulations that impose costs in excess of benefits.

According to pure economic theory, the goal is to maximize the former type of regulation and minimize or repeal the latter. However, there are two big challenges that make practical application of this economic theory extremely difficult if not virtually impossible.

First, actually measuring and assessing the costs and benefits of regulation is exceptionally challenging. As mentioned above, many of the costs of regulation are hidden and/or occur over long periods of time.

How would those costs be measured, and what discount rate would be used to convert those costs into present-value dollar terms?

If some of the costs of regulations manifest themselves indirectly through reduced competition and decreased innovation, how could we measure the opportunity costs of the lost products and services that never enter the market, or the absence of lower prices and higher quality of which consumers are now deprived?

What other unintended consequences of regulations might we miss due to the indirect and often veiled effect they have on incentives?

Likewise, government regulations may indeed produce some benefits, at least for some people, and measuring those benefits is no less problematic.

What would beneficiaries of regulations be willing to pay in the market to receive those gains? How would we price or value the benefits? How do those benefits occur over time, and what discount rate would we use to express their present value?

Some regulations may result in lives saved. How would we value a human life, and how would that compare to the costs of the regulations that led to the preservation of lives? As callous as it may seem, economists have no less than six different methods of valuing a statistical human life for CBA purposes. Which method would prove “best” and under what circumstances?

Additionally, just because government regulations may exhibit benefits is not alone enough to justify them. The social benefits of the regulations must exceed the society-wide costs, or the price is simply not worth it.

It is just this hard reality that leads to the second challenge in the effective application of regulatory theory: even if we can overcome the first hurdle of cost-benefit measurement, most of the political forces governing the passage, implementation, and enforcement of regulations strongly resist subjecting them to any kind of cost-benefit analysis.

This is especially true of the proponents of government regulation who often justify the regulations by emphasizing only the most obvious of benefits while ignoring (and encouraging others to ignore) the direct and indirect costs.

For those who propose greater and ever-more government regulation, either out of ideological zeal or for opportunistic and protectionist reasons, no cost is apparently too high a price to pay to achieve whatever benefits they believe will result.

For them, any attempt to transparently measure and compare the costs with the benefits risks exposing regulations to uncomfortable truths that might make it more politically difficult for their supporters.

Yet, if government regulations truly result in the benefits promised by their proponents, we should at least have the opportunity to perform a cost-benefit analysis on them.

Just because CBA of government regulation is difficult and complex does not mean we should not do the best we can to make comparisons. But in the case of regulation, thorough CBA is rare.

The result is that the proponents of government regulation often receive a free pass, a kind of benefit of the doubt in their advocacy for more laws and rules.

The burden of proof falls on the opponents and critics of government regulations to muster the case against. However, from an economic point of view, this is exactly backward.

The onus of proof, and the duty to clearly demonstrate that benefits exceed costs, should fall squarely on the shoulders of those who propose new regulations, and it should be incumbent upon them to answer the arguments of opponents in the public forum.

Otherwise, the special interest demand for more regulation will be virtually infinite, since regulation advocates will not be forced to bear the cost of producing sound supporting evidence in the form of rigorous CBA. The result is the continued stifling and throttling of market competition and marketplace efficiency, to the benefit of only a few narrow interests.

What Happens if the Banking System Fails?

Most US banks are FDIC insured. If your bank is one of them, then you can count on the FDIC to make sure you get your money in the event of a failure.

The FDIC’s first choice is for a healthy bank to assume the insured assets of a failed bank. In some cases, this option is not available, and the organization will cut you a check for your insured deposits.

When a bank fails, it may try to borrow money from other solvent banks in order to pay its depositors. If the failing bank cannot pay its depositors, a bank panic might ensue in which depositors run on the bank in an attempt to get their money back.

This can make the situation worse for the failing bank, by shrinking its liquid assets as depositors withdraw cash from the bank. Since the creation of the FDIC, the federal government has insured bank deposits up to $250,000 in the U.S.

When a bank fails, the FDIC takes the reins and will either sell the failed bank to a more solvent bank, or take over the operation of the bank itself.

Ideally, depositors who have money in the failed bank will experience no change in their experience of using the bank; they’ll still have access to their money, and should be able to use their debit cards and checks as normal.

In the event that a failed bank is sold to another bank, account holders automatically become customers of that bank, and may receive new checks and debit cards.

Examples of Bank Failures in the US

During the 2007-2008 financial crisis, the biggest bank failure in U.S. history occurred when Washington Mutual, with $307 billion in assets, closed its doors. Another large bank failure had occurred just a few months earlier when IndyMac was seized.

The second all-time largest closure was the $40 billion failure of Continental Illinois in 1984. The FDIC maintains an up-to-date list of failed banks on its website.

What are the Problems Faced by Banks?

While banking has come a long way since the advent of coins and financial systems , there are still critical problems with banks today.

The digital transformation of any industry could be a challenging task. When it comes to banking, things get even more crucial due to its heavy impact on common people and security concerns.

So, while there is a promising future of technology in banking, there are still critical problems with banks today. Today we are going to look into such common banking challenges that are going to be a major concern for banks.

1.  Consumer expectations

The customer experience is at the forefront of the challenges facing the banking industry today. In many ways, traditional banks are not delivering the level of service that customers are demanding, especially when it comes to technology.

For example, more customers are using mobile devices for transactions. A 2018 study found that 50 percent of banking customers use their smartphones or other mobile devices. But customers still expect in-person customer service as well.

The same study found that 25 percent wouldn’t be comfortable opening an account with a bank that didn’t have a local presence.

2. Lack of Personalization

What fin-tech startups and established players like above have done is offer customized experiences to people. This is where many banks still lack due to traditional operating models.

Banks need to address each of their customers as an individual and build a relationship with them. It is no more sufficient to provide a generic solution. All customer engagements and interactions need to be personalized, and this goes beyond just addressing them with their name when sending email/SMSes.

Banks need to know what the customers’ preferred channel of interaction is, and always contact them through this channel. Equally important is to maintain consistency in customer engagement and experience across the various channels involved. This is a challenge today as banks have developed to work in silos.

Customers today access the bank through every increasing touchpoints. They take anywhere, anytime, any device access to banking services for granted. Banks, under pressure to not being left behind by the wave of digital proliferation end up rushing out new apps. This has a side-effect of creating even more channel silos.

Banks today need to take a leaf out of other industries that value customer experience. The time when the focus of the bank was on transaction execution is now gone. Banks need to realize that it is but a small part of the customer experience.

They need to, instead, focus on the complete customer journey and adopt an omni-channel strategy that the retailers have successfully implemented for their services.

3.  Increasing pressure from competition

Young consumers especially are open to change in their financial services provider. In a recent survey, Accenture found that 31 percent of banking customers would consider banking with Facebook, Amazon or Google if they offered the same type of services they currently enjoy.

Already, financial technology (fintech) startups like Robinhood or Acorns are taking advantage of this mindset by offering apps that support investing and other innovative financial services.

4.  Investor expectations

Despite all of the news about banking profits, banks and other financial institutions are not meeting their shareholders’ expectations for return on investment or equity. Part of the reason for this is the lack of accurately understanding customer expectations, which translate into lower customer enrollment and retention rates.

5.  Regulatory conditions

Regulations in the banking and financial services industry continue to escalate, requiring banks to spend a large part of their discretionary budget on compliance. Building systems and processes that are able to keep up with regulations and industry standards require resources on every level.

Traditional banks especially are experiencing these types of challenges, forcing them to constantly evaluate and improve their operations to keep up with the swiftly changing tide of consumer and stakeholder expectations, technology and industry regulations.

Financial services companies now are facing a new set of factors as they contemplate how to generate sustainable growth. Banking and other financial services companies need to secure a controlled strategy to innovate and help refine the consumer engagement model in a digitally native world.

6. Lack of Security Measures That Don’t Interfere with Customer Experience

Over the last decade, the frequency of data breaches has continuously increased, and the risk of cyber attacks has become more and more apparent. It is not more a question of if, but when an attack would take place. The persistent losses that BFSI institutes and customers have faced has made risk-management on all customer-facing channels a top priority.

In an effort to manage risks, multi-layer authentication strategies have been implemented in banking technologies. The trouble is these strategies have not only been resource intensive but also have deteriorated customer experience.

There increasingly is a demand to unify authentication across channels. It is also important that authentication techniques applied are rational and commensurate with the level of risk involved in a given transaction.

7. Limited Use of Point-of-Sale Systems

As India moves towards a less-cash economy, it has become imperative that POS payment systems get more and more mobile. Handheld POS payment systems are already in the market, but not all of them handle authentication well.

Banks also need to develop technological solutions that can work in conjecture with smartphones and tablets, rather than be a bulky device that needs to be carried around whenever someone wants to swipe a card.

The rise of digital wallets presents another opportunity of simplifying POS transactions. Players like PayTM have already cornered the market with simple QR code-based instant payment systems. Banks need to either find a way to integrate their technology with these or provide their own instant payment solutions to work with digital wallets.

Further, banks need to find a way to go beyond traditional banking services and provide value-added services through their POS payment systems. Given the huge amount of data that the banks capture through their POS systems, they should also employ data processing to generate customer insights for the merchants.

Third party solutions that use big data stream processing and machine learning to provide actionable insights at the time of POS activation are already in the market. Given that the bank has a much larger dataset available, they could offer much better insights by identifying their audience.

Another important feature that banks need to add to POS systems is POS promotions for their cardholders. Such promotions are regularly run when a customer makes an online payment; it is time the banks provide similar offers when swiping at a POS.

8. Slow Adaptation to New Technologies

Banking, as an industry, has been traditionally slow to adapt to technology due to reasons like non-agile systems, mindset of leaders, regulatory concerns, etc.

However, if banks really want to attract modern consumer especially the millennial generation,  they need to quickly adapt and wow the customer with latest technology that is visible to them. Of course, banking technology should be used in a manner that adds value to the customer. This would create customer delight, and help shift your customers from being satisfied with being loyal.

The more loyal the customers, the higher their lifetime value will be to the bank. This, in turn will build shareholder value. The challenge here is investing in the right technology at the right time. The investments in cutting edge banking technology do not pay off immediately.

Based on the banking technology being explored, the timeframe for a market-ready experience could be from a few years to a few decades.

For example, it is clear the voice-based interactions through platforms like Alexa and Google are here to stay. Many users of these technologies talk to these virtual personal assistants and expect them to get things done at the bank. Banks today are exploring ways to provide a voice interface.

This raises completely new questions that the bank needs to answer: what does your bank sound like? Is it male or female or “robotic”? How will authentication take place when interacting through voice? What should the tonality be? How “hip” should the bank sound? Is the bank old or young? Answering these questions, and getting the right assistant may take a lot of trial and error. How can banks ensure that they get it right at the earliest?

9. Creating a customer experience culture

This is the biggest challenge that the banks face today – creating a new culture for the new and dynamically shifting marketplace.  Traditionally, banks have focused on selling their products and executing transactions. The problems faced by banking sector that we have seen so far indicates that it is time that banks create a customer experience culture instead.

What does this mean?

The banks will have to shift their viewpoint from inside-out to outside-in. Meaning instead of finding ways they can sell their products to the customer, they need to see the world through the customer’s eyes and provide solutions to the problems they face.

This is easier said than done. While the change will have to be driven from the leadership, the execution can only be done by empowered employees who buy into the leadership’s vision. 

Why do Governments Regulate Banks?

Banking regulation has existed in some form since the chartering of banks and its goals have evolved over time. Today, banking regulation serves four main purposes.

Financial Stability

Instability in the financial system can have material ripple effects into other parts of the domestic and international financial sectors. Supervision that is focused on financial stability (often called macro-prudential supervision) looks at trends and analyzes the likelihood for financial contagion and the possible impacts across firms that pose systemic risks.

Protection of the Federal Deposit Insurance Fund

Since Jan. 1, 1934, the Federal Deposit Insurance Corp. has insured the deposits held in U.S. banks up to a defined amount (currently $250,000 per depositor per bank). The federal government serves as a backstop to the insurance fund.

In exchange for this insurance guarantee, banks pay an insurance premium and are also subject to safety and soundness examinations by state and/or federal regulators. Oversight of individual financial institutions by banking regulators is called micro-prudential supervision.

While the insurance fund protects depositors, it does not protect shareholders of banks. When inappropriate risks are taken and prove unsuccessful, banks will fail and be liquidated.

Consumer Protection

Since the creation of the Federal Trade Commission in 1914, the federal government has had a formal obligation to protect consumers across industries. Since that time, numerous laws and regulations have been crafted by various agencies to protect bank customers and promote fair and equal access to credit.

Banks conduct financial transactions with consumers either directly (lending to consumers and taking consumer deposits) or indirectly (through financial technology on the front end, for example). Banking regulators enforce consumer protection regulations by conducting comprehensive reviews of bank lending and deposit operations and investigating consumer complaints.

Competition

A competitive banking system is a healthy banking system. Banking regulators actively monitor U.S. banking markets for competitiveness and can deny bank mergers that would negatively affect the availability and pricing of banking services.

Although fewer than 40 banks account for more than 70 percent of all U.S. banking assets, as shown in the table below, there are nearly 6,000 institutions of all sizes operating in communities across the country.

Do Regulations Hurt the Economy?

Of course, not all regulation is bad. Regulations that focus on basic worker or consumer safety often have benefits that outweigh their costs. But many regulations on the books today go way beyond basic safety, which isn’t surprising considering the rapid growth of the CFR just mentioned.

Such regulations protect established businesses by limiting entry or increase firms’ costs without providing an offsetting safety benefit, harming workers, customers, and potential entrepreneurs in the process.

And this harm is not just theoretical. The studies in a recent issue of the academic journal Public Choice focus on how regulation impacts lower-income people and many of them find harmful effects.

One study by Dustin Chambers, Courtney A. Collins, and Alan Krause finds that regulation leads to higher consumer prices—a 10% increase in total regulation leads to about a 1% increase in prices.

They also find that low-income households spend more of their money on the goods and services most prone to regulation-induced price increases. This means too much regulation worsens the financial problems of people who are already struggling.

Another study by G.P. Manish and Colin O’Reilly finds that more intense banking supervision and regulation is associated with greater income inequality.

They attribute this finding to regulatory capture, in which banking-industry insiders capture the regulatory process and use it to promote the interests of established banks at the expense of competitors. The result is fewer banking options for low-income households which makes it harder for them to accumulate wealth.

A third study by Dustin Chambers, Patrick McLaughlin, and Laura Stanley finds that more federal regulation is associated with more poverty at the state level. Using a measure of the federal regulatory burden imposed on each state, they find that at 10% increase in a state’s regulatory burden is associated with a 2.5% increase in the state’s poverty rate.

In addition to these studies, others show that too much regulation reduces employment growth and business investment, both of which contribute to lower wages for workers.

Luckily, people are starting to pay closer attention to the costs of too much regulation. Several state governments have either reduced regulations or set up processes to do so. Kentucky has set up a red-tape-reduction initiative that has already repealed or amended 27% of the state’s administrative regulations.

Rhode Island is engaged in an ambitious program to reduce its regulatory burden and the state’s Code of Regulations recently won an innovation award. Virginia also has a bipartisan plan in place to reduce unnecessary regulation and Idaho is in the process of analyzing its entire regulatory code after lawmakers failed to reauthorize it.

Not to be outdone, the Trump administration has tried to take similar steps at the federal level. So far it has been unable to repeal as many regulations as Trump initially hoped, but it has significantly slowed the growth of new regulations, as shown in the figure below from the Regulatory Studies Center at George Washington University.

The administration has also pressured states to reform their occupational licensing and reduce land-use regulations that drive up the cost of housing. The effectiveness of these actions remains to be seen but since both types of regulation disproportionately hurt low-income people it’s encouraging to see that the administration is skeptical of them.

Regulation has costs and benefits, but for too long the costs were largely ignored. As a result, there’s too much regulation at all levels of government and recent research highlights how all this regulation is particularly harmful to the country’s poor.

Read Also: Digital Banking Problems Faced by the Elderly

Regulatory reform efforts in Kentucky, Rhode Island, Virginia, and other states—along with the federal reforms—are a good step towards simplifying the maze of regulation entrepreneurs must navigate and more states should follow their lead.

Do Governments Control Banks?

If a nation’s economy were a human body, then its heart would be the central bank. And just as the heart works to pump life-giving blood throughout the body, the central bank pumps money into the economy to keep it healthy and growing. Sometimes economies need less money, and sometimes they need more.

The methods central banks use to control the quantity of money vary depending on the economic situation and power of the central bank. In the United States, the central bank is the Federal Reserve, often called the Fed.

Other prominent central banks include the European Central Bank, Swiss National Bank, Bank of England, People’s Bank of China, and Bank of Japan.

Central banks work hard to ensure that a nation’s economy remains healthy. One way central banks accomplish this aim is by controlling the amount of money circulating in the economy.

Their tools include influencing interest rates, setting reserve requirements, and employing open market operation tactics, among other approaches. Having the right quantity of money in circulation is crucial to ensuring a stable and sustainable economy.