Obviating The Moral Hazards That Caused The Recent Banking Crisis And Future Dislocations With The Imposition Of Regulations, Reserve Requirements, Revenue/Risk Adjusted Payouts

This paper will examine the critical aspects of the Glass-Steagall Act of 1933 including a detailed analysis of the objective of the act on the banks and the economy. A further review will explore the atmosphere and psychology of the various banking practices that were implemented during the 1980’s and 1990’s. A chronology of pivotal events will prove that the current environment of deregulation and erosion of the distinct line between commercial and investment banks is actually attributed to monetary policies dating back to Alan Greenspan and the Federal Reserve Board actions of the 1990’s. The start of the 21st entury saw the rapid growth of derivative instruments that were not regulated, prompting the moral hazard which caused the mortgage banking industry collapse. A further analysis of the reckless practices will show how these lending practices caused financial chaos. The companies that failed did so because of overleveraging and failure to control risk effectively while rewarding themselves without establishing adequate reserves. The paper will conclude with an analysis of the present arguments to strengthen the core requirements for both the investment and commercial banking