Regulatory Choke Holds on Economic Growth

Glenn Yago and Susanne Trimbath

in Beyond Junk Bonds

Published in print May 2003 | ISBN: 9780195149234
Published online November 2003 | e-ISBN: 9780199871865 | DOI:
Regulatory Choke Holds on Economic Growth

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The chapter starts by pointing out that a fundamental mismatch exists between the sources of job creation and capital formation in the USA, and that US financial history can be read as a long attempt to resolve this. Flow of funds data from the 1950s to the late 1990s reflect the relative contraction of financial institutional sources of capital and the expansion of capital markets. However, an analysis of this structural shift shows that small businesses have participated less than large ones (although they represent over 40% of total assets, debt, and net worth), and they remain disproportionately dependent on banks as their major source of capital. The effect of the recession of the early 1990s on such small firms is discussed in terms of the four sources of regulatory chokes (i.e. overregulation) that have hampered their economic growth: banking regulations, insurance regulations, thrift regulations, and merger regulations. The last part of the chapter discusses the reinvention of financial institutions and the restructuring of regulation, and financial technology transfer for small businesses – such as developing secondary markets for small‐firm equity and debt, and the creation of derivatives or issue of bonds or certificates by investment originators.

Keywords: banking regulations; banks; bond issuance; capital access; capital formation; capital markets; derivatives markets; economic growth; institutional capital; insurance; insurance regulations; merger regulations; mergers; overregulation; secondary markets; small businesses; thrift; thrift regulations; USA

Chapter.  5685 words.  Illustrated.

Subjects: Financial Markets

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