To understand the rationale for regulating multinational banks, it is
first important to review the history of the regulation of domestic banks.
Though the detailed history varies widely from country to country, the
earliest banks were not the same kind of institutions that we have today.
Currently, banks serve both deposit and lending functions; that is, they
issue liabilities that are a convenient medium of exchange, and are in-
termediaries between borrowers and lenders. The great early banking
houses loaned out their own capital, not other people's money. There
existed other specialized institutions that accepted deposits for safekeep-
ing. It is only later that the two functions, lending and deposit taking,
were fused into banking institutions--usually connected to the needs of
the sovereign for financing expenditures ( Dale 1984, 54). The intertwin-
ing of these two functions necessarily implies that banks are subject to
the problem of banks runs, since the funding source for assets is mostly
depositors' funds and, to a much lesser extent, the bank's capital. In the
early nineteenth century, banks operated with capital ratios in the 40
percent range in Europe and 70 percent in North America. In the United
States, as the state or federal government began to play a greater role in
the prudential regulation of banks, the capital ratios declined dramati-
cally. Because banks also lacked transparency, they were prone to runs
( Dale54).

In the United States, the involvement of the federal government in
banking regulation began during the Civil War. The purpose of the Na-
tional Banking Act was to create a safe and uniform currency but, and
just as important, provide a source of demand for government debt.
During the Great Depression, the U.S. financial system was compart-
mentalized into commercial banks, investment banks, savings and loans,
and so on, and deposit insurance was implemented. Though a few U.S.
banks had an international presence, it was not until after World War II
that international banking began to expand. The Marshall Plan, which
encouraged U.S. foreign direct investment, provided the impetus for the
expansion of global banking. However, bank regulation changed
slowly--understandable perhaps in a world with a system of fixed
exchange rates and dominated economically by the United States.

Domestic events and concerns dominated banking supervision and
regulation. As it developed over 150 years in the United States, the ra-
tionale for the prudential regulation of domestic financial institutions can
be summarized as (1) the protection of (unsophisticated) depositors, (2)
monetary stability, (3) the promotion of an efficient, competitive financial
system, and (4) consumer protection. It is not the purpose of domestic
banking regulation to prevent all bank failures, to substitute government
decision making for private bank decisions, or to favor certain groups

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