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Obstacles to Optimal Policy: The Interplay of Politics and Economics in Shaping Bank Supervision and Regulation Reforms

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  • Randall S. Kroszner
  • Philip E. Strahan
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    Abstract

    This paper provides a positive political economy analysis of the most important revision of the U.S. supervision and regulation system during the last two decades, the 1991 Federal Deposit Insurance Corporation Improvement Act (FDICIA). We analyze the impact of private interest groups as well as political-institutional factors on the voting patterns on amendments related to FDICIA and its final passage to assess the empirical importance of different types of obstacles to welfare-enhancing reforms. Rivalry of interests within the industry (large versus small banks) and between industries (banks versus insurance) as well as measures of legislator ideology and partisanship play important roles and, hence, should be taken into account in order to implement successful change. A divide and conquer' strategy with respect to the private interests appears to be effective in bringing about legislative reform. The concluding section draws tentative lessons from the political economy approaches about how to increase the likelihood of welfare-enhancing regulatory change.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7582.

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    Date of creation: Mar 2000
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    Publication status: published as Obstacles to Optimal Policy: The Interplay of Politics and Economics in Shaping Bank Supervision and Regulation Reforms , Randall S. Kroszner, Philip E. Strahan. in Prudential Supervision: What Works and What Doesn't , Mishkin. 2001
    Handle: RePEc:nbr:nberwo:7582

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    References

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    1. Alberto Alesina & Geoffrey Carliner, 1991. "Politics and Economics in the Eighties," NBER Books, National Bureau of Economic Research, Inc, number ales91-1.
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    Cited by:
    1. Mark Carlson & Kris James Mitchener, 2005. "Branch Banking, Bank Competition, and Financial Stability," NBER Working Papers 11291, National Bureau of Economic Research, Inc.
    2. Guohua Feng & Apostolos Serletis, 2009. "Efficiency and productivity of the US banking industry, 1998-2005: evidence from the Fourier cost function satisfying global regularity conditions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 24(1), pages 105-138.
    3. Heinemann, Friedrich & Schüler, Martin, 2002. "A Stigler View on Banking Supervision," ZEW Discussion Papers 02-66, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    4. Braun, Matias & Raddatz, Claudio, 2007. "Trade liberalization, capital account liberalization and the real effects of financial development," Journal of International Money and Finance, Elsevier, vol. 26(5), pages 730-761, September.
    5. Cécile Carpentier & Jean-Marc Suret, 2003. "The Canadian and American Financial Systems: Competition and Regulation," Canadian Public Policy, University of Toronto Press, vol. 29(4), pages 431-447, December.
    6. Pagano, Marco & Volpin, Paolo, 2002. "The Political Economy of Finance," CEPR Discussion Papers 3231, C.E.P.R. Discussion Papers.
    7. Enrico C. Perotti & Ernst-Ludwig von Thadden, 2004. "The Political Economy of Dominant Investors," Tinbergen Institute Discussion Papers 04-091/2, Tinbergen Institute.
    8. Friedrich Heinemann & Martin Schüler, 2004. "A Stiglerian View on Banking Supervision," Public Choice, Springer, vol. 121(1), pages 99-130, October.
    9. International Monetary Fund, 2006. "Regulatory Capture in Banking," IMF Working Papers 06/34, International Monetary Fund.
    10. Gabriella Montinola & Ramon Moreno, 2001. "The political economy of foreign bank entry and its impact: theory and a case study," Pacific Basin Working Paper Series 2001-11, Federal Reserve Bank of San Francisco.

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