First, regulation is a cost that is like taxation: someone bears the cost of regulation. The public must always ask whether the benefits outweigh the costs. Second, regulation has a time element - regulations must change with the times. Old regulations may prevent or impede market growth. As markets change, so must regulations. Third, regulation should not prevent the effective working of market forces. For example, we should avoid bank failures, but not prevent all bank failures. Chairman Alan Greenspan of the US Fed (1997), said “our goal as supervisors should not be to prevent all bank failures, but to maintain sufficient prudential standards so that banking problems that do occur do not become widespread.” What are we regulating? We can regulate products, functions or institutions or a combination of all three. Problems arise when we have overlapping regulatory terrain, competing regulatory agencies and confused regulatory objectives. There are also arguments for and against the concentration and competition in regulatory agencies. A good example of a one-stop regulatory agency is the Monetary Authority of Singapore, which combines the regulation of the banking system, the securities market and the insurance industry in one institution. At the other end of the spectrum, the US banking sector is regulated by at least four different agencies, the Federal Reserve system, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC) and the state banking commissioners.

If we believe the above theories, and assume that regulations impose ultimately a cost on the consumer or taxpayer, it may be in the public interest to remove regulations and allow greater competition. This is the primary driving force behind current market deregulation policies prevalent in OECD markets. A recent example of the deregulation drive to “make markets work better” is the report of the Australian Financial System Inquiry (Wallis Report), whose recommendations seek to:create a flexible regulatory structure which will be more responsive to the forces for change operating on the financial system; clarify regulatory goals; increase the accountability of the agencies charged with meeting those goals; ensure that the regulation of similar financial products be more consistent and promote competition by improving comparability; introduce greater competitive neutrality across the financial system; establish more contestable, efficient and fair financial markets, resulting in reduced costs to consumers; provide more effective regulation for financial conglomerates which will also facilitate competition and efficiency; and facilitate the international competitiveness of the Australian financial system. On the other hand, a market without regulation also does not work. Free banking and frontier capitalism results in control by the Mafia, with huge losses inflicted on the innocent and unwary. The public interest theory argues that regulation is an attempt to correct for market failures, such as monopoly, externalities and lack of information. For example, the social cost of the failure of a financial institution may be much higher than the private cost to the institution itself.