What happens if the central bank permits too many banks in a country?if a central bank of a country allows too many commercial banks and other financial institutions to open in the country wat will be the negative effect in the country economy and stock market?? | |
The number of banks in a country usually doesn't have any bearing on risk to the economy or stock market. It is primarily the lack of regulations that puts and economy at risk.
In the US, there is a minimum capital requirement to open a bank, requires the bank to pay FDIC insurance on deposits, requires constant auditing by bank regulators, requires minimum capital reserve, and limitations on investing practices. The reason that problems occurred over the past couple of years was because of lack of enforcement of regulations and/or reduction in regulations.
Prior to 1980, there were tens of thousands of banks in the US and there wasn't much of a problem. It wasn't until the deregulation of commercial banks during the 1980s, 1990s, and 2000s that major banking problems started to occur. Prior to 1980, banks could only conduct business in one state so Bank of America and Well Fargo only did business in California and Chase only did business in New York. Also commercial banks were not allowed to perform risky investment banking and primarily only did loans to homeowners and businesses.
In countries such as many Caribbean countries, those countries may have little regulations for banks. Generally those governments do not insure depositors, allow investors to open a bank with little of no money, and don't have any government oversight. Therefore the risk is high for bank failures since the investors will likely lose little or no money and the government doesn't have any stake in guaranteeing deposits.
