On February 1, 1971, the National Association of Security Dealers instituted an automatic quoting system for over-the-counter stocks. Heralded as a major advance in the elimination of market imperfections, the National Association of Security Dealers Automatic Quote System (NASDAQ) allowed bidand- ask prices of different firms in this geographically dispersed market to be centralized. Essentially its operation allowed individual “houses” to obtain the various bid-and-ask prices of market makers for a given unlisted security.

This paper addresses the question of appropriate policy prescription in face of rapid consolidation of the financial service sector both in the US and globally. Regulators must act even as the legislation that is in place offers little guidance on how they should proceed in this broader financial market. Appropriate action can only come from a proper analysis of the current situation. The context must be understood, the causes of this merger wave must be evaluated, and the implications on both market structure and customer service must be considered. Only then can the implications for optimal or even reasonable policy be outlined. The prescription must fit the situation. These remarks will review these topics in an effort to answer the question, “What’s a policymaker to do?”

This paper discusses the nature of fixed and variable loan contracts and derives the conditions which determine the optimal quantity of each. The results indicate that the payoff functions are quite different and dependent upon the project financed. The appropriate conditions for the allocation of loan terms to a set of borrowers are then developed. Finally, the analysis derives the optimal portfolio frontier and risk‐return trade‐off for the banking firm. Here, it is demonstrated that the solution is unlikely to be at a point of zero interest rate risk.

This paper argues that current discount window policy, coupled with non‐borrowed reserve targeting of the Federal Reserve, makes the quantity of high‐powered money endogenous. Examination of the advisability of this procedure in a stochastic environment is conducted using a general equilibrium financial model. It is concluded that the current policy reduces the destabilizing effects of shifts between various depository financial assets, but increases the effect of other asset portfolio shifts and aggregate supply disturbances. These results are consistent with the work of Poole inasmuch as the current debate over discount policy is a repackaging of the debate over interest rate or aggregates control for monetary policy.