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What Should Banks Do?

By Robert E. Litan

The financial services industries are undergoing revolutionary change. Continuing technological advances, coupled with the removal of controls on deposit interest rates and barriers to interstate bank expansion, have ushered in a new age of competition among banks themselves and between banks and other types of financial institutions. What Should Banks Do? offers a new and controversial proposal for carefully circumscribed diversification.

Robert Litan first examines what role banks should play in this altered environment: Should banks and their holding companies be confined to the “business of banking: and related activities? Or should banking organizations be permitted to engage in much wider set of businesses? He answers these questions by thoroughly reviewing the available evidence on the benefits and risk of expanding bank powers. He finds that the largest benefits would come from the reduced risk that most bank holding companies would face if they were permitted to diversify their service offering. He sees risks to the safety and soundness of the banking system from financial product diversification, but proposes ways to minimize them.

In the final chapter, Litan outlines two basic policy frameworks form minimizing the risks while preserving the social benefits that increased competition will eventually produce, He concludes that the challenge for policy-makers is to act decisively to maximize the benefits of financial product diversification, while limiting its risks, before the rapid changes in the financial services industries make it too late to do so.

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