Over the course of time and across countries, approaches to bank regulation have varied from extremely light to all encompassing, from highly interventionist regulations and even outright government ownership to episodes of “free” banking. In most countries, the level of regulatory intervention in banking has increased dramatically relative to that in other sectors since the Great Depression (Calomiris, 2003). Before looking in detail in Chapter 3 at current regulatory arrangements around the world, this chapter discusses the ways in which societies approach financial sector regulation, the primary features of regulation and supervision, and how external forces are shaping the regulatory choices that countries make.

The first part of this chapter begins with the broad conceptual foundations for bank regulation. As with government interventions in other sectors, those in banking can be examined from the standpoint of the broader debate on the role of government in an economy. Two mostly opposing camps set the boundaries for this debate.

The public interest view holds that governments regulate banks to facilitate the efficient functioning of banks by ameliorating market failures, for the benefit of broader civil society.