Aggregative Consequences of Removing Restrictions

Any change or sequence of changes in the operating responsibilities, rules, standards of performance, rights or prohibitions affecting the relative and absolute positions of banks and non-bank financial institutions has many consequences. Output, prices, employment, tax collections and budget deficits, relative rates of return on real and financial assets and other aggregate measures of prices and performance are affected. There are two principal reasons. (1) Every regulatory change alters the value of the charters of one or more of the various types of financial institutions and the costs and revenues of the firms in one or another branch of the industry. Virtually all financial institutions are regulated; all are restricted from engaging in some activities and, by various inducements, many are encouraged to engage in particular activities -- for example mortgage lending. Entry, branching, and merger are regulated, and the locations at which a particular institution is permitted to operate varies with both the operation and the type of institution. (2) Each of the principal types of financial institutions is subject to a different federal tax rate ranging from zero (for credit-unions) to a rate approaching the average corporate tax rate for commercial banks. In several cases, there are differences in the procedures for computing taxable net income. It would be more than usually heroic, powers or monopoly rights and privileges of the various types of institutions would have no Aggregate effect. It would be just as heroic to assume that total tax collections, in a multiple tax system, would remain unchanged in the face of changes in- the lending and borrowing powers and therefore the taxable income of particular types of institutions.