Banking is a highly regulated industry because of its high operation risk. So obviously, some cost of
regulatory requirement must be incurred. It always costly for banks.
There are many types of cost of regulation, and the very important two types are opportunity cost and operation
cost.
As the opportunity cost, which is very
common and easily understood, means the cost that banks must abandon some
profitable activities that are beyond the regulatory requirements. Some
activities, such as mortgages or loans, maybe highly profit but also highly risky.
So they are not welcomed by the regulatory provisions. Banks may hate the
legislative committee because they make them lose a large potential gain.
For operation
cost, it arises from operating the regulation. According to the Gregory
Elliehausen(1998), for example, such cost like material which used to report to
customers or government, or the cost which need to spend to meet such
regulatory requirement. And the operation cost also can be separated in two parts: start-up cost and ongoing cost. The costs that arise from making some
deployment of the agency to meet the requirement are start-up cost which is
one-time. The ongoing cost is the cost, which incurred from preforming the
regulatory provision.[1]
But how we
measure the cost of regulation? There are two ways, which are used very often. Collecting
data and econometric method. Collecting data requires relevant members to question bank staff
about the cost. But because of Asymmetric information, this way is less efficient.
Some researchers use econometric method such as model to deal with the cost.
However, as is known to all, it is very hard to choose the factors.
