Does regulation drive innovations?
Proposals to expand the permissible activities
of banks and bank holding companies
invariably, begin with the observation that recent
capital market innovations have made
households and businesses more willing to hold
assets directly (e.g., FDIC, 1987; Huertas,
1987; Corrigan, 1987). These innovations, it
is argued, have led to declines in bank profitability
and market share and to rapid growth
in the investment banking industry. According
to this view, banks will become an increasingly
less important part of the financial system.
Thus, it is argued, the preservation of a safe
and profitable-banking system makes it necessary
to expand bank or bank holding company
powers.
