Deregulation of banking is good for growth

More Than Mortal · May 14, 2015, 04:04:05 PM

Quote

We exploit the introduction of free banking laws in US states during the 1837-1863 period to examine the impact of removing barriers to bank entry on bank competition and economic growth. As governments were not concerned about systemic stability in this period, we are able to isolate the effects of bank competition from those of state implicit guarantees.

We find that the introduction of free banking laws stimulated the creation of new banks and led to more bank failures. Our empirical evidence indicates that states adopting free banking laws experienced an increase in output per capita compared to the states that retained state bank chartering policies.

We argue that the fiercer bank competition following the introduction of free banking laws might have spurred economic growth by (1) increasing the money stock and the availability of credit; (2) leading to efficiency gains in the banking market. Our findings suggest that the more frequent bank failures occurring in a competitive banking market do not harm long-run economic growth in a system without public safety nets.

challengerX · May 14, 2015, 04:43:18 PM

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More Than Mortal · May 14, 2015, 05:01:01 PM

Quote from: challengerX on May 14, 2015, 04:43:18 PM

Deregulation of banks has led us to these problems and were a big factor in causing the Great Recession.

Not as much as people seem to think; too much bad regulation was probably a bigger factor than too little good regulation. I think the study is valid, since the banking system would've been much less complicated and local in the 1800s, but there is a place for certain generic regulation in the modern financial system.

Namely liquidity and capital requirements, along with publicly published plans by all banks over a certain size for how they would wind down if they found themselves insolvent.

Not Comms Officer · May 14, 2015, 11:35:24 PM

Nice try, Capitalist bank shills!

ΚΑΤΑΝΑΛΩΤΗΣ · May 15, 2015, 12:02:35 AM

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CND AAA Beef · May 18, 2015, 11:39:55 AM

It kinda bit the US in the ass, since deregulation caused a lot of smaller banks to move into subprime loans, then the larger banks jumped on that bandwagon too, and we all know how that went.

But that was a case of "too much too soon". The subprime crisis may not have been as severe if the big guys did some 80s style corporate raiding and swallowed up all the smaller regional players. The cost of acquisitions would have been a deterrent to engaging in risky operations.

And really, a lot of those "Mom and Pop" banks shouldn't have been allowed to operate anyways.