Answer to Question #317644 in Economics for Comfort

Question

Explain the purpose of regulating the boundaries that exist with the financial system

Answer 1

The regulatory boundaries of banking systems are designed mainly to protect within them certain crucial economic functions.

Banks operate the economy’s most important payment and settlement systems. It would be difficult for a market-based economy to carry out its essential functions if buyers of goods and services were unable to settle their transactions by debiting their bank accounts (or borrowing on bank credit lines) in favor of the bank accounts of sellers. Similarly, a wide range of important financial contracts and securities trades are settled through payment systems operated by banks or bank-controlled clearinghouses. 

Also, regulators ban many forms of speculative trading by bank holding companies while allowing them to trade to hedge their

banking risks and to provide clients with underwriting and market-making services.