Deregulation and Financial Intermediation Cost: An International Comparison

Abstract

AbstractCalculations for 15 countries reveal falling unit costs of financial intermediation in most cases, especially where unit cost was high during the 1970s. This result coincides with the concomitant convergence of both unit cost and the deregulation index over the period: Countries with a high unit cost were initially more strictly regulated and subsequently deregulated more. Despite this, the international unit cost barely declined due to the decreasing weight of low unit cost countries in total financial production after the mid‐1980s. Focusing on the specific effect of deregulation, the econometric analysis displays a negative and significant link between deregulation change and unit cost variation. Further analyses reveal that the effect of a change in deregulation depends on banks' market power. Thus, the stagnating unit cost observed in the United States and the United Kingdom, the two largest providers of financial services, could be due to weaker deregulation reforms—deregulation was already high in these countries during the 1980s—and a concomitant reduction in competition.