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Why do we regulate banks? As George Benston and George Kaufman point out in an article in the May 1996 issue of the Economic Journal, they don't serve food that might sicken unsuspecting customers and they don't deal in dangerous materials that might explode or cause plagues. Rather, they provide checking accounts and investment services, make loans, and facilitate financial transactions. Why should we be concerned about what they do any more than we are about what any ordinary business does? Why regulate banks more than any other financial sector that has asymmetric information and externalities? In most countries, banks were private, unregulated entities. Historically, clearinghouses and other private monitors rather emerged to limit the risk taking of financial institutions and spillovers from one financial institution to others and the real economy. Private sector solution thus arose to deal with many of these concerns. In the last century or so, however, and...

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