DP5864 The Cost of Banking Regulation

Author(s): Luigi Guiso , Paola Sapienza , Luigi Zingales

Publication Date: October 2006

Keyword(s): macroeconomics , monetary economics

JEL(s): E0 , G10

Programme Areas: Financial Economics , International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP5864.asp.asp

We use exogenous variation in the degree of restrictions to bank competition across Italian provinces to study both the effects of bank regulation and the impact of deregulation. We find that where entry was more restricted the cost of credit was higher and - contrary to expectations- access to credit lower. The only benefit of these restrictions was a lower proportion of bad loans. Liberalization brings a reduction in rates spreads and an increased access to credit at a cost of an increase in bad loans. In provinces where restrictions to bank competition were most severe, the proportion of bad loans after deregulation raises above the level present in more competitive markets, suggesting that the pre-existing conditions severely impact the effect of liberalizations.