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Chapter 5: Regulation of banks (Arguments against regulation) (Fear of…
Chapter 5: Regulation of banks (Arguments against regulation)
C
ost of regulation
Real resource costs incurred
by
regulators
and
regulated
Admin costs
of r
egulatory authority
Admin costs associated with
banks' own compliance activities
Cost of
dedicated capital
to
comply
with
capital requirements
Contribution of funds
to
compensate
clients of other failed banks
(
FDIC, SDIC
)
F
ear of over-regulation
Decreases competition
-
limiting portfolio choices
or
restricting branching
Decreases
growth of financial innovation
Raises costs - reduce profitability
Creates
moral hazard
Banks
may try to
take on more risk
since they know they are
likely to be bailed out
when
in difficulties
Depositors are less likely
to
monitor
the banks if they know
regulators are monitoring
and if their
deposits are protected
by the
deposit insurance
even if the banks fail
Depositors
will simply place their
deposits in
banks offering the
highest interest rate
,
regardless of their riskiness
D
rive business to other centres
Banking activities will simply move to off-shore centers where regulation is lighter
Solutions
Minimize the cost associated with regulation
Regulation of banks should be kept to a minimum, just enough to prevent bank runs and to maintain public confidence
Greater harmonization in regulation of banks across the world, to remove redundant and conflicting standards
Lead to
more risk taking
, the very thing
regulation is supposed to curtail