Since the financial crisis, “deregulation” has become a catch-all phrase for everything that went wrong in our financial markets. Unfortunately said deregulation is rarely ever explained, but is rather asserted. To truly inform policy debates, discussions must center on specific instances of deregulation. One such example of banking deregulation that did actually occur was the The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (imagine that, a Democrat Congress and a Democrat President deregulating the banking industry). The heart of Riegle-Neal was to remove barriers to interstate branching. 

A recent article in the Journal of Finance looks at the impact of bank branching deregulation on the distribution of income across U.S. States. A working paper version can be found here. The researchers find that as bank deregulation increased competition and improved efficiency, “deregulation materially tightened the distribution of income by boosting incomes in the lower part of the income distribution while having little impact on incomes above the median. Bank deregulation tightened the distribution of income by increasing the relative wage rates and working hours of unskilled workers.” The bottom line is that the increased competition that resulted from deregulation disproportionately benefited those on the bottom of the income distribution. As Washington continues to pile additional new regulations upon the banking industry, we should bear in mind that much of the impact of increased regulation might be felt by those least able to bear it.

The extent to which regulatory barriers in banking benefits the rich at the expense of the poor is also illustrated in a forthcoming article, again in the Journal of Finance. In this article, the authors find in the early 20th century, counties where the elite had disproportionately large land holdings had fewer banks per capita, with costlier credit, and more limited access. The authors see this as suggestive that elites restrict financial development in order to limit access to finance, and hence maintain existing income inequalities.

One of the lessons I take away from these papers is that we need to examine banking regulation/​deregulation as it actually occurs and is implemented, and not how we believe some all knowing, benevolent government would impose it. The odds seem to me that the more extensive is banking regulation, the more likely it is to be captured by economic elites and narrow interests.