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New Directions in Financial Services Regulation$
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Roger B. Porter, Robert R. Glauber, and Thomas J. Healey

Print publication date: 2011

Print ISBN-13: 9780262015615

Published to MIT Press Scholarship Online: August 2013

DOI: 10.7551/mitpress/9780262015615.001.0001

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An Ounce of Prevention: Financial Regulation, Moral Hazard, and the End of “Too Big to Fail”

An Ounce of Prevention: Financial Regulation, Moral Hazard, and the End of “Too Big to Fail”

(p.99) An Ounce of Prevention: Financial Regulation, Moral Hazard, and the End of “Too Big to Fail”
New Directions in Financial Services Regulation

David A. Moss

The MIT Press

This chapter first takes into account the history of financial crises in America, citing financial crises as a regular and often debilitating feature of American life. The lack of a crisis for about 50 years, here, is attributed to the federal government’s active role in managing financial risk. This is a role which began to blossom in 1933 with the passage of the Glass-Steagall Act, which introduced federal deposit insurance, expanded federal supervision of banks, and separated commercial banking from investment banking. Critics of the Glass-Steagall Act, however, cited problems that could have arisen, such as the undermining of the nation’s financial system, or the encouragement of excessive risk taking or “moral hazard.” In the end, private financial institutions and markets cannot always be relied upon to manage risk effectively on their own. As a result, the best way to address the issue is through the identification and systematic regulation of significant financial institutions on an ongoing basis.

Keywords:   history of financial crises, managing financial risk, Glass-Steagall Act, federal deposit insurance, federal supervision of banks, commercial banking, investment banking

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