Banking Reform vs. Political Delays: Two Forces That Shape Our Economy

Based on Bertrand et al. (2007) and Leverty and Grace (2018) 

Sometimes a simple banking rule change can reshape entire industries. Other times, an election calendar can decide if a failing company gets a lifeline. Two important economic studies show how these hidden forces of finance and politics drive our economy in surprising ways.

In 1985, France changed its banking rules. Bertrand et al. (2007) found this had a huge effect. After the reform, banks stopped propping up failing companies. This was tough on those firms. But it made the economy healthier overall. More productive companies got funding. New jobs were created in growing businesses. The study showed that efficient banks help the economy through "creative destruction." This means old, inefficient firms die out so new, better ones can grow.

But politics can slow down this necessary process. Leverty and Grace (2018) looked at U.S. insurance regulators. It found they delay closing failing companies before elections. Nobody wants bad news before a vote. This delay is worse when the regulator is an elected official, not an appointed one. The scary part? These political delays often mean the failing company costs more to fix later.

Together, these stories show a tug-of-war in our economy. On one side, efficient finance helps good businesses grow and replaces bad ones. On the other side, political cycles can keep failing businesses alive too long. One force speeds up economic change. The other force hits the pause button.

These studies suggest that how we design our banks and our regulators matters. Good rules can help money flow to the best ideas. Insulating regulators from politics can make tough decisions happen on time. Getting this balance right helps everyone, fostering an economy that innovates and grows without unnecessary crashes. 

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References

Bertrand, M., Schoar, A., & Thesmar, D. (2007). Banking Deregulation and Industry Structure: Evidence from the French Banking Reforms of 1985. The Journal of Finance, 62(2), 597–628.

Leverty, J. T., & Grace, M. F. (2018). Do elections delay regulatory action? Journal of Financial Economics, 130(3), 637–655.