Opinion: Daily Journal

A Captivating Question

RALEIGH – The North Carolina Banking Commission did the right thing the other day – but the fact that it even needed to make the decision in question was troubling, as was its justification.

The commission staff was responding to a question from Harold Keen, head of KS Bank in Smithfield and one of the 22 members of the commission board. Keen wanted to know if the state had been approving “too many” new bank charters. Explaining himself later to Triangle Business Journal, Keen argued that one of the roles for the commission was to ask and answer precisely this question. “I don’t want to put so many [banks] in the market where it hurts the overall industry … this is an issue that’s come up before,” he said.

I’m sure it has. It would be a rare regulatory body, federal or state, that didn’t end up considering policies intended not to serve the interests of consumers or bystanders but instead the very interests being regulated. The phenomenon is called regulatory capture. There is a literature on the subject going back many decades, as practitioners and scholars alike chronicled and dissected specific instances of regulatory agencies restricting supply or otherwise boosting the bottom lines of existing firms at the expense of potential competitors and consumers.

The late George Stigler, Nobel-winning economist at the University of Chicago, explored the real economics of regulation and set the stage for much subsequent work on regulatory capture. Stigler was, as the online Concise Encyclopedia of Economics put it, “the quintessential empirical economist.” He and like-minded scholars looked at data on the regulation of utilities, airlines, banks, the legal and medical professions, and other fields, concluding that most often restrictions sold as enhancing “quality” or promoting “stability” were actually designed to protect current businesses and boost their profits. It’s not hard to understand how this happens. Regulators get much of their information from those they regulate. They work with them on a daily basis. In many cases, there’s a revolving door between government agencies and trade associations or firms. Lobbyists for the industry frequently shape the legislation setting up regulatory agencies. Indeed, as longtime watchers of legislative politics in Raleigh know, proposals for new boards or commissions to regulate emerging professions almost invariably come from the professions themselves. They know what they are doing. Unfortunately, the consuming public isn’t always clued in.

I don’t mean to suggest that states have no legitimate role in regulating business transactions. They do. A limited government, respecting individual liberty and the right of contract, has an important role to play in preventing or limiting the use of force and fraud in commerce. The force part should be obvious – theft and extortion aren’t market behaviors, and are always criminalized – but the fraud part gets a little trickier to define and legislate. Some free-market advocates believe that detecting, deterring, or punishing fraud should be left solely to the courts, responding to and adjudicating specific complaints. I don’t have that much faith in lawyers and courts, frankly. I think it is legitimate for legislators to create agencies that require potential vendors of goods and services to provide basic information to consumers to ensure a true meeting of the minds and deter fraudulent behavior.

In financial services, for example, I think there is a proper state role in setting disclosure requirements, particularly for complex transactions such as insurance contracts. As for the North Carolina Banking Commission itself, I think that its sole role should be to register newly chartered banks and enforce disclosure rules. In responding to Keen’s request, commission staff reportedly an extensive report demonstrating that North Carolina did not have too many banks – and thus, there was no need for the regulatory agency to worry.

Good. But the question of how many banks should exist should never be of interest to the banking commission. If there’s any doubt about that, the General Assembly ought to consider clarifying this in a rewrite of the commission’s authorizing legislation. The “right” number of banks is properly determined only by the voluntary behavior of market actors, and will never be a fixed number. Such information is far too slippery ever to be grasped by regulators, captured or not.

Hood is president of the John Locke Foundation.