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. The result, in many cases, was the establishment of cartelized oligopolistic clubs of semi-specialized intermediaries, that led to the appearance of largely self-regulating clubs with agreed rules of conduct.
The cartelized oligopolistic structure limited competition, guaranteed franchise value and reduced likelihood of failure. This was partly due to Continue reading ‘Supervisory Scheme Under Modifying Financial System’ »