The impact of regulation on financial intermediation

This paper classifies financial regulations by their primary objective into six types: macroeconomic, allocative, structural, prudential, organizational, and protective. The author notes that the most regulations have effects that cut across different objectives and that structural controls are the most controversial types of financial regulation. The author maintains that many of the problems facing the United States financial system, such as the fragmented and fragile banking system, the financial crisis of the thrift industry, and the segmented banking and nonbanking parts of the financial system, can be attributed to the adverse effects of structural regulation. Finally, he argues that the most important task facing policymakers is creating a sound and robust financial constitution that governs what financial institutions are permitted to do and what basic conditions they have to meet. But, he adds that the financial constitution needs to be as far as possible neutral between different types of financial intermediaries and markets. Such a framework would contribute to higher efficiency and stability in the first place and would thus avoid the cost of later interventions.