The John M. Olin Center

Paper Abstract

Untitled Document

69. Jeffery Y. Zhang, The Costs and Benefits of Banking Deregulation, 04/2017.

Abstract: Seven years after the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), the political environment has shifted the focus toward deregulation. Almost any deregulatory action would increase the scope of banks’ operations by construction. This, in turn, would increase their number of counterparties--or increase the magnitude of exposures with existing counterparties--which would result in greater interconnectedness of the banking system. What are the costs and benefits of such a deregulatory pivot? This article attempts to answer this question by drawing on lessons from episodes of state-level banking deregulation in the United States during the late twentieth century. The analysis shows that expanded operations and increased interconnectedness lead to a potential trade-off between increased local growth and lower regional volatility on one side of the scale, and greater systemic fragility on the other. Policymakers should internalize this trade-off as they modify or eliminate existing regulations promulgated since Dodd-Frank.