The Economics and Politics of Banking Regulation in the Industrialized World, 1850-2000

Wesleyan University, Middletown CT

Investigators

Abstract

Although social scientists and policy makers have devoted considerable effort to explaining the consequences of banking regulation, comparatively little research has been directed towards explaining the underlying reasons for the enactment of different regulatory measures. The objective of this research is to first assemble a dataset on banking regulations enacted across the industrialized world during the past century and a half. The regulations to be examined include entry regulation, capital requirements, reserve requirements, the enactment of double liability for bank shareholders, the ability of banks to engage in securities market transactions (universal banking), lender of last resort, branching, and the requirement to publish bank balance sheets. The second objective is to use that dataset to systematically assess the economic and political motivations, including stability, efficiency, monetary control, and redistribution, for such regulation. The substantial database for this project, which includes banking, macroeconomic, political, and legal information, will come from a variety of contemporary and historical sources. These include reports of national central banks and governments, the financial press, and various international agencies, such as the League of Nations, Bank for International Settlements, European Union, Organization for Economic Cooperation and Development, published electronic databases, and a substantial secondary historical literature. This grant supports a pilot study of the time series of regulatory enactments in one country: Germany. The results of the research will increase our understanding of the political economy forces that lead to changes in bank regulation. Because the structure of banking has been shown to influence financial stability and economic growth, explaining the pattern and timing of banking regulation will help account for differences in financial structure and, therefore, will help explain differences in economic growth among countries. Finally, since regulation is an ongoing process, understanding the motivation behind earlier regulation may allow current day policy makers to anticipate the political and economic pressures demanding a regulatory response and may help them avoid some of the pitfalls of their predecessors.