A Story of Three Bank-Regulatory Legal Systems: Contract, Financial Management Regulation and Fiduciary Law

Abstract

How should banks be regulated to avoid their failure? Banks must control the risks they take with depositors' money. If depositors lose their trust in their banks, and demand their money, the banks will fail. This article describes three legal bank regulatory systems: Contract with depositors (U.S.); a mix of contract and trust law, but going towards trust (Japan) and a full trust-fiduciary law regulating banks (Israel). The article concludes that bank regulation, which limits the banks' risks and conflicts of interest, helps create trustworthy banks that serve their country best.