Evaluating the Effect of Regulatory Compliance Costs on Banking Profitability and Lending Practices

Posted: Dec 09, 2022

• Levi Campbell
• Harper Anderson
• Liam Harris

Abstract

The global financial landscape has undergone significant transformation since the 2008 financial crisis, with regulatory frameworks expanding substantially to enhance financial stability and consumer protection. This regulatory expansion has generated considerable debate regarding its economic consequences, particularly concerning the compliance burden imposed on financial institutions. While previous research has acknowledged the existence of regulatory costs, the precise mechanisms through which these costs affect banking operations, profitability, and ultimately lending behavior remain inadequately understood. This research addresses this gap by developing a novel methodological framework for quantifying regulatory compliance costs and tracing their transmission through banking operations to lending outcomes. Traditional approaches to studying regulatory impacts have often relied on simplified cost measures or focused exclusively on large financial institutions. Our research introduces several methodological innovations, including a comprehensive compliance cost index that captures both direct expenditures and indirect costs.