A theory of banking regulation

Abstract

Aiming for better understanding and policy recommendations for the banking industry, this study seeks to explore optimal banking regulations with due considerations given to the CRA (Community Reinvestment Act) and FDIC (Federal Deposit Insurance Corporate) as representatively the most important regulatory tools in seeking efficiency in banking operations and preventions of system risk. In the procedure of theoretical proof, this study not only incorporates problems of agency of banks but also real sector and depositors' interactions in the seeking for private and public profit shares into the system. Therefore, the results of this study would provide venues of optimizing banking regulation policies that are explicitly expressed in the realization of series economic factors. It suggests the necessaries to form the strategic policies to monitor the movements of market risk premium with the proper estimation of future economic states, average, recession, or economic boom. The failure of monitoring these two components may theoretically imply the inefficient achievements of subsidies and deposit insurances. © EuroJournals, Inc. 2010.