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Economic Perspectives, 12, No. 2, March 1988
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.


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