Delays and Distorsions in Reforming Banking Regulation: A Political Economy Tale

24 Pages Posted: 29 Aug 2014

See all articles by Donato Masciandaro

Donato Masciandaro

Bocconi University - Department of Economics; Bocconi University - Department of Economics (ECO)

Mattia Suardi

Paolo Baffi Center - Bocconi University; Institute of Advanced Study (IUSS - Pavia)

Date Written: August 2014

Abstract

After the 2008 Financial Meltdown the need to reconsider the separation between commercial banking and other financial risky activities - ring fencing - in order to mitigate systemic risks and to address the too big to fail problems was publicly recognized both in the United States and in Europe. In spite of this widespread demand for structural banking regulation reform, the ring fencing proposals - the Volcker Rule in the US Dodd Frank-Act, the Vickers Report in the UK, the Liikanen Report in the European Union - are still in their infancy. How to explain the difficulties in enacting structural banking regulation? The article presents a political economy view: the incumbent policymakers are politicians, and their personal cost and benefit analysis in introducing ring fencing can be different from the social one, when relevant private interests - the banking constituency - are present. The article sheds light under which economic and political conditions the structural regulation is likely to be postponed, modified or even distorted, using a formal model to discuss the ongoing legislative processes both in the US and in Europe. The article highlights that the actual degree of separation between commercial and investment banking can depend on a political cost and benefit analysis and it is likely to be different from the social optimal setting the more the politicians are influenced by banking lobbies.

Keywords: Great Crisis, Banking Regulation, Ring Fencing, Political Economy, US, Europe

JEL Classification: E44, G18, G28, H11

Suggested Citation

Masciandaro, Donato and Suardi, Mattia, Delays and Distorsions in Reforming Banking Regulation: A Political Economy Tale (August 2014). Baffi Center Research Paper No. 2014-158, Available at SSRN: https://ssrn.com/abstract=2488452 or http://dx.doi.org/10.2139/ssrn.2488452

Donato Masciandaro (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Bocconi University - Department of Economics (ECO) ( email )

Via Gobbi 5
Milan, 20136
Italy

Mattia Suardi

Paolo Baffi Center - Bocconi University ( email )

Milano, 20136
Italy

Institute of Advanced Study (IUSS - Pavia) ( email )

Italy

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
173
Abstract Views
1,374
Rank
311,233
PlumX Metrics