Monday, July 30, 2018

George Stigler on His Head: The Consequences of Restrictions on Competition in (Bank) Regulation

Prasad Krishnamurthy, U.C. Berkeley School of Law studies George Stigler on His Head: The Consequences of Restrictions on Competition in (Bank) Regulation.

ABSTRACT: Bank regulation used to be riddled with price, product, entry, and location restrictions. These restrictions were intended to prevent the recurrence of crises, such as those of the 1930s and 1940s. Over time, however, regulatory acquiescence to technological and institutional innovation undermined their ability to limit competition. An intellectual turn toward valorizing competition also hastened their demise. George Stigler, in particular, provided a trenchant critique of all such regulation as the product of pure rent seeking by private industry.

This Article revisits the role of such restrictions on competition in banking. On the one hand, the public choice account of these restrictions as the outcome of private rent seeking is essentially true. On the other hand, their unintended historical result was to limit banks’ risk-taking incentives and to coopt banks into preventing regulatory arbitrage. Viewed from this perspective, these restrictions provide an important legal, political, and economic (LPE) model for how limits on competition could usefully complement current bank regulation. This model is one in which, to some extent, regulation facilitates rather than frustrates cartel formation in order to maintain a more stable equilibrium.

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