What are the reasons why banks are heavily regulated in the economy?
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Banks are being trusted with other peoples money. If the bank acts recklessly, it could fail and those depositors would lose potentially their entire life's savings. For this reason banks are regulated. This could happen when banks make bad loans or investments.
Compound the fact that deposits are insured by the government and you have many new layers of regulation. If the insured bank fails, insurance is paid up to a specified limit. To protect that pool of funds behind the insurance, the banking regulators make sure that banks are conducting business appropriately.
By virtue of having this insurance, the government is able to impose many new rules and use the banks as an enforcement arm. This may be enforcement of fair lending laws or anti-money laundering laws. Lastly, consumer protection regulations are meant to help people. These regulations require banks to do certain things such as making disclosures or providing credit counseling notices. All these things come at a cost.
Between meeting the consumer law requirements, meeting regulatory expectations and just existing in a litigious society, regulatory relief won't truly be seen for a very long time. The protections are for those who vote for elected officials, and those elected officials are not about to take consumer protections away.
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Banks are being trusted with other peoples money. If the bank acts recklessly, it could fail and those depositors would lose potentially their entire life's savings. For this reason banks are regulated. This could happen when banks make bad loans or investments.