NCPA - National Center for Policy Analysis

Bank Deregulation and Income Inequality

January 12, 2011

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 Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.  The heart of Riegle-Neal was to remove barriers to interstate branching, says Mark A. Calabria, director of financial regulation studies at the Cato Institute.

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:

  • 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.  One of the lessons to take away 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, says Calabria.

Source: Mark A. Calabria, "Bank Deregulation and Income Inequality,", January 4, 2011.

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