and Soundness: The Debate
on Bank Regulation
The goal of balancing competition and soundness is unique to the current debate on financial structure. In the late nineteenth and early twentieth centuries, such topics as the needs of customers and the competitive forces that shape the way financial intermediaries meet those needs were "markedly absent" from the discussion. 1 The concept that increasing competition between intermediaries would contribute to the public good by reducing the costs of financial transactions and widening the number of customers and firms involved in intermediation was eclipsed by the competitive struggles between state and federal regulators and the anticompetitive manifestations of financial concentration. The social and economic costs of financial failures were the burning issues of the day, and soundness regulation received priority attention.
Now, however, soundness regulation is seen by some as an unnecessary burden that inhibits the release of competitive forces. At the extreme are those who imply that increasing competition will displace the need for soundness regulation—or argue, at least, that in a truly competitive environment, market forces rather than direct regulation are the appropriate instruments for ensuring soundness as well as promoting competition. Others argue that soundness regulation is as important as ever, even if there is room for an enhanced role for market forces, and that changes in regulatory and financial structure must focus not only on releasing