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Banking regulation, regulatory capture and inequality

Author

Listed:
  • G. P. Manish

    (Troy University)

  • Colin O’Reilly

    (Creighton University)

Abstract

Regulation of the banking and finance industry may lead to a more equal distribution of income if regulators pursue goals in the public interest. Alternatively, the economic theory of regulation predicts that regulatory and supervisory processes may be captured by the banking industry, leading to policies that promote the industry’s interests. The liberalization of the banking and finance sector since the 1980s has produced more intense banking supervision and prudential regulation. In this study we find that banking supervision regulation is associated with greater income inequality. These findings are consistent with the economic theory of regulation. We interpret these results as evidence that regulatory capture in the banking and finance industry can have pernicious effects on the distribution of income.

Suggested Citation

  • G. P. Manish & Colin O’Reilly, 2019. "Banking regulation, regulatory capture and inequality," Public Choice, Springer, vol. 180(1), pages 145-164, July.
    • Handle: RePEc:kap:pubcho:v:180:y:2019:i:1:d:10.1007_s11127-018-0501-0
    DOI: 10.1007/s11127-018-0501-0
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    Cited by:

    1. Choudhury, Sanchari, 2023. "The causal effect of regulation on income inequality across the U.S. states," European Journal of Political Economy, Elsevier, vol. 80(C).
    2. Chambers, Dustin & O'Reilly, Colin, 2022. "Regulation and income inequality in the United States," European Journal of Political Economy, Elsevier, vol. 72(C).
    3. Edward Peter Stringham, 2023. "Banking regulation got you down? The rise of fintech and cryptointermediation in Africa," Public Choice, Springer, vol. 197(3), pages 455-470, December.
    4. Orla McCullagh & Mark Cummins & Sheila Killian, 2023. "Decoupling VaR and regulatory capital: an examination of practitioners’ experience of market risk regulation," Journal of Banking Regulation, Palgrave Macmillan, vol. 24(3), pages 321-336, September.
    5. Zach Raff, 2023. "Identifying the regulator’s objective: Does political support matter?," Public Choice, Springer, vol. 194(3), pages 277-295, March.
    6. Dustin Chambers & Colin O’Reilly, 2022. "The economic theory of regulation and inequality," Public Choice, Springer, vol. 193(1), pages 63-78, October.
    7. Michael Munger & Cameron Tilley, 2023. "Race, risk, and greed: Harold Black's contributions to the institutional economics of finance," Public Choice, Springer, vol. 197(3), pages 335-346, December.
    8. Chambers, Dustin & O'Reilly, Colin, 2019. "Entry Regulations and Income Inequality at the Regional Level," Journal of Regional Analysis and Policy, Mid-Continent Regional Science Association, vol. 49(1), April.
    9. Kärnä, Anders & Karlsson, Johan & Engberg, Erik & Svensson, Peter, 2020. "Political Failure: A Missing Piece in Innovation Policy Analysis," Working Paper Series 1334, Research Institute of Industrial Economics, revised 21 Apr 2022.

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    More about this item

    Keywords

    Regulation; Inequality; Regressive; Regulatory capture; Liberalization; Banking supervision;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance

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