Bank Regulation and Supervision3--The Cost of Bank Regulation

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.

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1.Gregory Elliehausen，The Cost of Bank Regulation: A Review of Evidence, Bulletin, April 1998.