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Economic Quarterly

Fall 1996

Firewalls

John R. Walter

Since the banking crisis of the early 1930s, laws and regulations have restricted banks' transactions with their nonbank affiliates. These restrictions, commonly known as firewalls, are meant to prevent the spread of financial difficulties within a banking company. In certain circumstances, banking company owners gain from shifts of nonbank losses to affiliated banks while the federal deposit insurance fund loses. Firewalls may provide a valuable regulatory tool for containing banking company owners' incentives to employ such shifts.

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