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The cost of banking regulation: a review of the evidence


  • Gregory E. Elliehausen


The cost of government regulation has become a political issue in recent years, and the cost is no less controversial for banks than for other types of businesses. The controversy has prompted several studies of regulatory costs in banking. This paper evaluates the evidence from those studies, which vary widely in quality and content, and suggests what can reasonably be concluded about the effects of regulation on banks' costs. It begins with a discussion of the sources and types of regulatory costs. It then discusses the requirements of the various methods of determining costs and evaluates published empirical studies in light of those requirements. The paper ends with a review of the studies' substantive findings. ; Regulation appears to account for a small but not inconsiderable share of banks' costs. The best available evidence, most of which is not very precise, suggests that the total cost of all bank regulations in 1991 (the year for which most of the studies were conducted) may have been about 12 percent to 13 percent of banks' noninterest expenses. Incremental costs--the costs of those required activities that are undertaken only because they are required--may have been about half of the total cost. ; Labor costs apparently are the major component of both the start-up costs and the ongoing costs of complying with regulations. Some studies suggest that the time spent by bank officers and managers on compliance activities, especially activities related to new regulations or to major revisions of existing regulations, account for a large portion of labor costs. ; Statistical analyses have detected, for several regulations, scale economies in compliance costs. This finding suggests that smaller banks, relative to larger banks, have a cost disadvantage that may discourage the entry of new firms into banking, may stimulate consolidation of the industry into larger banks, and may inhibit competition among institutions in markets for specific financial products. It also suggests the possibility that regulation in the early stages of the product life cycle--when output is low and average regulatory cost would be high--will discourage the introduction of new financial services. ; One survey found that the start-up costs of complying with a new regulation were insensitive to the number of changes required to bring a bank's practices and policies into compliance with the regulation. If this finding is generally true, then applying regulations generally to address the practices of a few institutions would impose costs on all institutions, not just on the few that must change their practices. This finding also suggests that a regulatory policy of making frequent minor revisions to regulations might be more costly to banks than one of making infrequent major revisions. ; The paper concludes that surveys can produce reasonably good data on regulatory costs if good survey methods are followed. Carefully designed studies can increase knowledge of the effects of regulation on banks' costs. However, exercises that measure only costs and do not attempt to explain the determinants of cost are likely to have limited value. Our current understanding of the determinants of regulatory costs is based on analysis of a small number of regulations by a few researchers. Further research covering more and different types of regulations and regulatory requirements is clearly needed.

Suggested Citation

  • Gregory E. Elliehausen, 1998. "The cost of banking regulation: a review of the evidence," Staff Studies 171, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgss:171

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    References listed on IDEAS

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    Cited by:

    1. Martin Eling & David Pankoke, 2016. "Costs and Benefits of Financial Regulation: An Empirical Assessment for Insurance Companies," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 41(4), pages 529-554, October.
    2. Cull, Robert & Demirgüç-Kunt, Asli & Morduch, Jonathan, 2011. "Does Regulatory Supervision Curtail Microfinance Profitability and Outreach?," World Development, Elsevier, vol. 39(6), pages 949-965, June.
    3. Alessandro Carretta & Vincenzo Farina & Paola Schwizer, 2010. "The “day after” Basel 2: do regulators comply with banking culture?," Journal of Financial Regulation and Compliance, Emerald Group Publishing, vol. 18(4), pages 316-332, November.
    4. Ana María Olaya Pardo & Manuel Ramírez Gómez, 2004. "Aversión al riesgo y eficiencia de escala en los bancos: Incluyendo variables de riesgo y regulación," BORRADORES DE INVESTIGACIÓN 004346, UNIVERSIDAD DEL ROSARIO.
    5. Whalen, Gary W., 2008. "The impact of preemption of the Georgia Fair Lending Act by the OCC on national and state banks and the dual banking system," The Quarterly Review of Economics and Finance, Elsevier, vol. 48(4), pages 772-791, November.
    6. Parashar Kulkarni, 2010. "Pushing lenders to over-comply with environmental regulations: A developing country perspective," Journal of International Development, John Wiley & Sons, Ltd., vol. 22(4), pages 470-482.
    7. Schüler, Martin & Heinemann, Friedrich, 2005. "The Costs of Supervisory Fragmentation in Europe," ZEW Discussion Papers 05-01, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    8. Schenkel, Andreas, 2016. "Kosten der Compliance-Regulierung: Eine empirische Untersuchung am Beispiel der deutschen Genossenschaftsbanken," Arbeitspapiere 169, University of Münster, Institute for Cooperatives.
    9. Stephanou, Constantinos, 2005. "Supervision of financial conglomerates : the case of Chile," Policy Research Working Paper Series 3553, The World Bank.
    10. Christian Bührer & Ivo Hubli & Eliane Marti, 2005. "The Regulatory Burden in the Swiss Wealth Management Industry," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 19(1), pages 99-108, June.
    11. Gregory Elliehausen & Barbara Lowrey, 2000. "The Costs of Implementing Regulatory Changes: The Truth in Savings Act," Journal of Financial Services Research, Springer;Western Finance Association, vol. 17(2), pages 165-179, August.
    12. Robert B. Avery & Raphael W. Bostic & Glenn B. Canner, 2003. "Assessing the CRA's Necessity and Efficiency," Working Paper 8606, USC Lusk Center for Real Estate.
    13. Carretta, Alessandro & Farina, Vincenzo & Schwizer, Paola, 2006. "Coordination & cooperation in financial regulation: Do regulators comply with banking culture?," MPRA Paper 8301, University Library of Munich, Germany.

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    Banking law ; Bank supervision;


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