U.S. banking regulations prevent banks from owning major corporations. In other countries, the banking industry is...

U.S. banking regulations prevent banks from owning major corporations. In other countries, the banking industry is much more integrated with the corporate sector, with banks owning corporations or being owned by them, allowing easier finance for corporations. Is the United States at a competitive disadvantage because of its regulations? What would be the benefits and costs if the United States were to liberalize its regulations and allow greater integration of banking and commerce?

Expert Solution

Yes, the United States is at a competitive disadvantage because of its regulations. This is because regulations are strict and banks are not allowed to own major corporations or to be owned by them leading to lower levels of integration of banking and commerce in the region. Due to lower levels of integration of banking at commerce in USA the country is at a competitive disadvantage because of two main reasons – easier finance for corporations are not as readily available as in cases of those countries in which banking and commerce are integrated. Secondly in many cases and instances loans are expensive on a comparative basis, even though marginally so.

The benefits that will come into picture if the United States were to liberalize its regulations and allow greater integration of banking and commerce is that finance will be available more easily and readily for corporations and this will give a stimulus to corporate expansion and economic development in the long run.

In terms of costs liberalization of regulations and allowing greater integration of banking and commerce may lead to excessive risk taking by corporations and hence the probability of default and corporate failures may rise in future. It may lead to creation of more risky asset portfolios for banks and hence their chances of failure will most probably increase in the long run.

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