Part II: The Impacts of Deregulation
In general, privatization is a tool governments can use to reduce their presence in the sphere of production. Deregulation effectively achieves the same goals, but instead of focusing on the sale of a firm, deregulation has to do with the removal of restrictions on already existing firms (Britannica, 2015). There are many different areas deregulation can take place in, but for this paper it will be narrowed down to the deregulation of the banking sector. Banks are similar to business in that they offer services, can be competitive and are very involved with the capitalist system. These attributes make banking deregulation a worthwhile area of study for this paper.
When looking at the effects of deregulation, it is most important to look at consumer welfare. The presumed purpose of deregulation is to increase consumer welfare by attempting to increase things like a consumer’s choice of bank, the variety of bank services available or the option to build a more diverse investment portfolio; therefore overall consumer welfare is a suitable indicator of the success for these initiatives. The first case of deregulation worth noting is a review of deregulation in Hong Kong. The author, Chun-Yu Ho (2009, 91) states simply that “(t)he industry becomes more competitive and consumer welfare is higher after deregulation.” This was a result of foreign banks entering the Hong Kong market which drove interest rates down. This meant less revenue for the banks which led them to diversify the range of offered services to maintain profitability. The same effect was present in South Africa (SA) during a period of banking deregulation in the early 1980’s. Here, banks exposed to foreign competitors for the first time rose to the challenge of competition and began to internationalize (Singletona and Verhoef, 2010, 536). This lead to stronger banks and presumably better consumer welfare as a result.
Unfortunately, this experience was not universal. In New Zealand (NZ) for example, deregulation allowed the stronger Australian banks to enter the country and dominate over the NZ banks who were evidently not strong enough to compete. This lead to a rise in equity and property prices and a shortage of credit for the people of NZ (Singletona and Verhoef, 2010, 550). In France when looking at the amount of monetary control the banks had, Jaques Melitz (1990, 399) said “the only solid indication about monetary control is negative.” This is indicative of his general sentiment that deregulation at his time of authoring was rather ineffective at inciting any significant positive change or increasing consumer welfare.
So, does regulation increase consumer welfare? The answer: sometimes. The success of deregulation appears to rely on many factors, be they geographical, historical (Singletona and Verhoef, 2010, 536) or cultural to name a few. The strength and willingness of domestic banks to compete in a deregulated system is also a significant factor. More research would need to be done in this area to know if there is a definitive set of principals that could make banking deregulation successful. Overall, it can be concluded that deregulation is promising and could reap many benefits for adopting countries, but, depending on a long list of country specific factors, deregulation could just as easily cause serious financial stress.
Picture titled, "Brisbane City by Night", taken by Lenny K Photography on March 14, 2016 obtained through Creative Commons.