Is Regulation Beneficial?
When do regulatory subsidies become regulatory burdens? That question is central to the debate over financial regulatory reform in the US. The prevailing wisdom among advocates of deregulation is that US financial regulation, although in many cases originating as subsidy, now imposes significant burdens on US financial institutions that have disadvantaged them when competing in global markets. For example, US regulation has kept financial firms small and specialized in a world in which diversified universal banks dominate; as a result, many US financial institutions may lack the size necessary to compete in global markets. US financial firms have proved skillful at using innovative legal structures to evade regulatory restrictions, but the high transactions costs associated with this strategy eventually may take their toll on the US financial industry, injuring its competitive position.
KeywordsFinancial Market Financial Institution Financial Regulation Security Market Regulatory Reform
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Notes and References
- Joseph Auerbach and Samuel L. Hayes, III (1986), Investment Banking and Diligence: What Price Deregulation? (Boston: Harvard Business School Press), p. 94.Google Scholar
- Adolf A. Berle, Jr. and Gardiner C. Means (1932; rev. ed. 1948), The Modern Corporation and Private Property (New York: Macmillan). As this author has pointed out, Berle and Means’ data, which documented the dispersal of equity ownership in the largest US corporations, was collected in 1930 and reflected market changes that had occurred in the 1920s, including (1) the growth of public securities markets as the favored avenue for corporate financing; (2) a significant increase in individual ownership of corporate stock, both directly and through collective investment vehicles such as mutual funds; (3) the development of active secondary trading markets, competition and innovation in the market for financial services. All of this occurred, and was documented by Berle and Means, before regulation such as Glass-Steagall took aim at the traditional structure of the financial industry. See Helen A. Garten (1992), ‘Institutional Investors and the New Financial Order’, Rutgers Law Review, vol. 44, pp. 585–603.Google Scholar
- As described in Chapter 1, as a result of Glass-Steagall, private banks like Morgan were forced to opt between deposit banking and investment banking. Morgan chose deposit banking, spinning off its securities business to the new firm of Morgan Stanley. For more on this decision and its competitive implications, see Ron Chernow (1990), The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance (New York: Atlantic Monthly Press), pp. 378–91.Google Scholar
- Arnoud W.A. Boot and Anjan V. Thakor (1996), ‘Banking Structure and Financial Innovation’, in Anthony Saunders and Ingo Walter (eds), Universal Banking: Financial System Design Reconsidered (Chicago: Irwin), pp. 420–9.Google Scholar
- E.g., George W. Mitchell (1967), ‘Exogenous Forces in the Development of Our Banking System’, Law and Contemporary Problems, vol. 1997, p. 3 (accusing the banking industry of ‘a pattern of traditional services, an imposed molecular structure, and a pedestrian operating technology’).Google Scholar
- Helen A. Garten (1991), Why Bank Regulation Failed: Designing a Bank Regulatory Strategy for the 1990s (Westport, CT: Quorum Books), pp. 81–8.Google Scholar
- Carter H. Golembe, ‘Commentary: A Little Moral Hazard’, Bank Expansion Reporter, vol. 8, 20 November 1989, p. 5; Helen A. Garten (1994), ‘A Political Analysis of Bank Failure Resolution’, Boston University Law Review, vol. 74, pp. 447–9.Google Scholar
- For an historical treatment of US regulators’ reliance on market discipline, see Helen A. Garten (1991), ‘Whatever Happened to Market Discipline of Banks?’ Annual Survey of American Law, vol. 1991, pp. 749–800.Google Scholar
- For a colorful description of the thrift industry and regulation in the 1980s, see Martin Mayer (1990), The Greatest Ever Bank Robbery: The Collapse of the Savings and Loan Industry (New York: Charles Scribner’s Sons), especially pp. 63–4.Google Scholar