Obstacles to Optimal Policy: the Interplay of Politics and Economics in Shaping Bank Supervision and Regulation Reforms.

This paper provides a politive political economy analysis of the most important revision of the U.S. supervision and regulation sustem during the last two decades, the 1991 Federal Deposit Insurance Corporation Imporovement Act (FDICIA). We analyze the impact of private interest groups as well as political-institutional factors on the woeing patterns on amendments related to FDICIA and its final passage to assess the empirical importance of different types of obstacles to welfare-enhancing reforms. Rivalry of interests within the industry and between industries as well as measures of legislator ideology and partisanship play important roles and, hence, should be taken into account in order to implement successful change. A "divide and conquer" strategy with respect to the private interests appears to be effective in bringing about legislative reform. The concluding section draws tentative lessons from the political economy approaches about how to increase the likelihood of welfare-enhancing regulatory change.