What is it about?
How regulators' rules and enforcement procedures incentivize innovation by regulated firms. Examples include> how branch-banking laws incentivized multi-office banking to be undertaken through holding companies and deposit-rate ceilings led banks to compete via merchandise premiums (e.g., toasters and TVs) and associated depositor services.
Featured Image
Why is it important?
Tripartite sequences of Regulation, Avoidance, and Avoidance-Driven Reregulation are found in all regulated markets. My model predicts that almost all restrictions on financial competition must lose force as time goes on. This is because maximization of firm value incentivizes a search for burden-reducing processes of competitive adaptation in the means and methods employed by regulated competitors. Regulated firms can be usefully likened to viruses that mutate to survive when faced with a series of evolving controls. Whatever social harm it may do, the process speeds the spread of innovative forms of competition.
Perspectives
The model explains why systems of rules become more and more complicated and why some industry-supported rules are ultimately abandoned. Looking at current Regulations as temporary outcomes undermined by an evolutionary process of Avoidance and politically influenced Reregulation is very instructive. The model helps one to understand how the product lines and competitive strategies of banks evolve to overcome control strategies.
Professor Edward James Kane
Boston College
Read the Original
This page is a summary of: Accelerating Inflation, Technological Innovation, and the Decreasing Effectiveness of Banking Regulation, The Journal of Finance, May 1981, JSTOR,
DOI: 10.2307/2327018.
You can read the full text:
Contributors
The following have contributed to this page
