The Modifying Nature of the Financial System
At the initial stage of development, commercial banks provided most of the services of financial intermediation. Later with the appearance of a variety of other financial intermediary services, such as investment banking, insurance, fund management, (notably between 1930 and 1970) strict demarcation lines between the various financial intermediaries and their functions was imposed with direct controls over competition between such intermediaries. For instance, the Glass-Steagall Act in the USA in 1933 prohibited provision of investment banking by commercial banking institutions and Italian Banking Law of 1936, which established the principle of separation between banking and non-financial activities .
With a view to limiting the risk of financial instability, significant restrictions on the lines of business, geographical location and operation of financial enterprises existed in many countries, sometimes supplemented by ceilings on deposit rates, new entry restrictions and official tolerance of cartel-type agreements. Read more
Problem of Separation Banking Supervision Function from Central Bank
Over the past years researchers specified possible benefits and costs of integration of monetary and supervisory functions under a single institution. The importance and widely different arrangements of bank supervision around the world has generated voluminous literature about the subject (from Bagehot 1873). However, last decade of studies investigate this issue more thoroughly. For instance, this issue was discussed by Haubrich (1996) who presented arguments of protagonists and opponents of the idea of separation or unification, and by Briault (1999) who critically analyzed the argument that there could be conflicts of interest between banking supervision and monetary policy if both were internalized in one institution. On the other hand, numerous empirical studies were performed, such as Goodhart and Shoenmaker (1995) and Di Noia and Di Giorgio (2000), investigating specific implications of different models. Moreover, Goodhart (2001) gives strong arguments towards combining these functions in the same entity. Read more
