The long period of financial repression, that is, direct control on bank lending to the private sector and force-feeding banks with government debt instruments had made the core business of commercial banks safe between the mid-1930s and the early 1970s. Central banks’ function of maintaining financial stability by way of regulation and supervision had atrophied.
Questions were vigorously set as to how monetary policy could be better applied to forestall booms and busts. The collapse of the Franklin National Bank of New York and the collapse of the infamous Bankhaus Herstatt in 1974 had turned out to be a clarion call for putting emphasis on regulation and supervision of banks.