Motives and Consequences Of Financial Regulation

The short version is that regulation often helps the Regulated and harms the poor.


The Harvard Law School Forum on Corporate Governance and Financial Regulation » Motives and Consequences Of Financial Regulation:

Fascinating piece that provides evidence of what we probably already knew: regulations can often hurt those they are designed to help. How? By preventing them access to markets and by limiting competition thereby helping the regulated.

FYI this post is based on a paper that is forthcoming in the Journal of Finance by Effi Benmelech and Tobias Moskowitz entitled: The Political Economy of Financial Regulation: Evidence from U.S. State Usury Laws in the 19th Century. However, I will also refer to the coverage of this paper by Benmelech on the Harvard Law Governance Blog

A few "look-ins" from each source:

From the paper itself

"We study the political economy of financial regulation and its consequences through the lens of usury laws in 19th century America. Usury laws are arguably the oldest form of financial regulation. Mentioned in the Bible and the Koran and dating back to ancient Rome, usury laws have long been the subject of religious and political debate

from the blog article:

"...the evidence we uncover appears most consistent with financial regulation being used by incumbents with political power for their own private interests—controlling entry and competition while lowering their own cost of capital."

from the conclusion to the paper (page 30)

"Our evidence suggests incumbents with political power prefer stringent usury laws because they impede competition from potential new entrants who are credit rationed. However, during financial crises when incumbents become credit rationed themselves, usury laws are relaxed. We also find that financial regulation is correlated with other restrictive political and economic policies adopted by the state designed to exclude other groups and protect incumbent interests."

Interestingly the authors find that how religious an area is matters when it comes to usury (from the paper itself p 28):

"....we regress the maximum legal rate on the number of church accommodations (seating capacity summed across all churches, temples, synagogues, and other religious dwellings)....More religious states adopt more strict usury laws."

and finally from the blog commenting on the importance of the laws (this is actually early in the article but I chose to conclude with it:

"... changes[ie making them more stringent] in these laws are associated with future economic growth and, importantly, that the impact on growth is concentrated exclusively among the smallest borrowers in the economy.""

I^3