I have just started reading a book by Tim Carney entitled “The Big Ripoff” and he makes many of the points I have made time and again – the effects of regulation are generally not the ones you would expect.

The fans of regulation are generally taken to be opponents of “Big Business” and they call for more regulation as a counter to the (alleged) pernicious effects of having large companies. Most of these effects are easy to see – strong pricing power, reduced service and many other things that are bad for the consumer.

The argument that Carney puts forward, though, is one I have been making for some time – both on this blog and elsewhere. The argument is a simple one. The more regulation you have in a market the more that regulation will favour the big suppliers – i.e. the larger incumbents – over the smaller incumbents, any potential new players, and, crucially, the individual consumers. So the more that you regulate the worse the situation gets for everyone but “Big Businesses”.

The reasoning is simple to see if you think about it – compliance is expensive. I know this as a simple fact – and my fee base confirms it. It costs money to comply with regulation. The more complex it is the more expensive it gets. For example – complying with the (old) Basel I Accord was a simple exercise. While it took a fair amount of work to get compliance when it first came in in 1988 / 89 most banking systems could comply with it fairly quickly and, importantly, cheaply.

While Basel II is a much better (i.e. risk sensitive) set of standards there is (I think) no-one out there that would claim they are simpler than Basel I. The amount of money that even a small bank following the Standardised / Basic methods of compliance had to spend was a fair leap from the amount they had to spend to spend under Basel I, and the amounts you have to spend to comply with the Advanced methodology (and therefore to get a substantial capital advantage) was many, many times more.

There is simply no way that a small bank or a new player can afford this without the belief that they will become a big bank (and therefore Big Business) as a result.

Even to keep the people needed to continue and upgrade these systems is expensive and needs a high (and profitable) turnover. There is no other way.

All of this means one thing – that more regulation makes it relatively more expensive for small businesses to operate that for large businesses and it imposes high barriers for new entrants into a market. Regulation therefore tends to help big business, not hinder it.


BTW – I should add that a post at catallaxy reminded me to w

rite this one.