By Dr. Massimo Massa, Rothschild Chaired Professor of Banking and Finance, INSEAD and Dr. Yan Wang, Associate Professor of Finance and Ruinan Liu, McMaster University
The rapid rise of artificial intelligence and digital transformation in the financial sector has placed a premium on specialized human capital. In this emerging “new economy”, a highly skilled and adaptable workforce is no longer just an asset—it is a cornerstone of competitive advantage. Banks that can attract and retain top talent are better positioned to excel in a rapidly evolving and innovation-driven century. A highly skilled workforce powers everything from innovation and operational efficiency to sophisticated risk management.
But as banks increasingly compete for top talent, they face a growing dilemma: The very employees who drive value creation also capture a larger share of it. The result is a complex balancing act. On the one hand, skilled labor can dramatically enhance a bank’s performance. On the other hand, retaining such talent is costly—and rising job mobility gives skilled professionals more bargaining power than ever before.
This raises a crucial question: Do highly skilled employees benefit customers and improve bank performance, or do they simply appropriate the benefits of their skills? The answer to this question will allow us to determine whether trade-secret laws provide flexible protection for proprietary business knowledge and employees’ skills.
Once focused narrowly on protecting technological innovations—such as algorithms and manufacturing processes—trade-secret law has expanded its reach to cover a wide range of intangible business assets, from client lists and pricing strategies to marketing plans. One of the more controversial tools in this legal arsenal is the inevitable disclosure doctrine (IDD). Under the IDD, firms can block former employees from joining rival companies by claiming that the employee would inevitably reveal confidential information—even if no explicit evidence of misconduct exists. While designed to safeguard corporate secrets, the doctrine also significantly limits employee mobility, tipping the scales of negotiation power toward employers. Recently, however, several US state courts have started to push back by ruling that the IDD is too restrictive and unenforceable. These legal decisions—effectively “rejections of the IDD”—provide a unique opportunity to study how the banking industry responds when the mobility of talent improves.
Research into these rulings reveals a clear pattern: When the IDD is rejected, skilled banking employees gain more freedom to switch jobs, have stronger bargaining positions and, in many cases, enjoy higher wages. For banks, this may result in both an enhanced ability to attract and retain skilled talent as well as increased labor costs—a shift that could have broad implications for pricing strategies, lending behavior and competitive dynamics across the sector.
As traditional banks contend with rising operational costs and intensifying competition—not only from peers but also from fintech (financial technology) and big tech—the importance of attracting and retaining talent has never been greater. Whether these investments in human capital deliver long-term value to customers and shareholders remains an open question. As legal barriers to job mobility decline, banks are grappling with the consequences—both within their organizations and in customer service. What are the implications of greater mobility among highly skilled financial professionals, for whom banks must now compete harder to retain?
To explore this question, we examine how traditional banks respond to legal shifts that increase the mobility of skilled labor. Our analysis focuses on US banks operating within a single state between 2001 and 2018, during which several states dismissed the IDD. This legal principle had allowed firms to block former employees from joining competitors, citing potential risks of inadvertently sharing proprietary information. When courts struck it down, skilled workers gained greater freedom to move—and banks had to adapt.
We ask two key questions: First, does increased labor mobility improve the operational efficiency of banks? Second, how do banks react to it?
The increased mobility of skilled labor is a double-edged sword. On the one hand, increased mobility of skilled labor strengthens employees’ bargaining power and allows them to negotiate higher pay. On the other hand, increased mobility of skilled labor leads to more efficient talent allocation and boosts labor productivity. If greater mobility simply empowers employees to command higher salaries—without banks being able to harness their skills fully—then productivity may not keep pace with rising labor costs. In such a scenario, highly skilled employees capture most of the economic rents from their expertise. As a result, we would expect an increase in job switching of skilled workers across banks, higher compensation but lower overall operating efficiency.
However, there’s a more optimistic outcome. If mobility allows banks to deploy talent more effectively—putting the right people in the right places—then the gains in productivity could outweigh the added compensation costs. This would lead to higher operating efficiency. In such a scenario, highly skilled employees do not capture all the rents from their skills—banks (and their potential customers) also benefit. As a result, we would expect an increase in job switching of skilled workers across banks, higher compensation and higher overall operating efficiency.
Our analysis points to an economically and statistically significant effect of the IDD on bank employees’ mobility and wages. Following the rejection of the IDD, banks in affected states saw a 1.18-percentage-point increase in the attrition rate of high-skilled employees—equivalent to a 17.9-percent jump in mobility compared to the national average. Wages also climbed: Compensation rose by about 6 percent for all bank employees and 8.4 percent for highly skilled staff. These changes significantly raised labor costs for affected banks compared to institutions in states where the IDD remained in effect.
More importantly, the net effect on bank operating efficiency was negative! In states where the IDD was invalidated, banks displayed a noticeable decline in cost efficiency relative to banks in states where the rule remained unchanged.Specifically, noninterest expenses per dollar of pre-event income rose by 4.3 percent, suggesting that the increased turnover and wage pressures associated with labor mobility translated into higher operational costs.
The second key question is whether banks pass on rising operational costs and increasing operational inefficiencies to their customers. The evidence suggests that, in many cases, they have!
We show that the answer relies on how banks respond in their product market offering and pricing—and that, in turn, depends on the banks’ bargaining power. In a highly competitive market, banks have little room to maneuver. Even if product market competition exacerbates cost pressures, it would be difficult for banks to pass on the additional labor costs to their clients, so they have to absorb the hit. That means customers see few changes—loan rates stay put, deposit rates remain stable, and product offerings don’t shrink.
But the story shifts when banks have more power. In a less competitive or more collusive market, banks can pass on the higher labor costs to their clients. If labor mobility brings efficiency gains, banks may keep the savings for themselves. If it leads to higher operational inefficiencies, they simply shift the burden. Therefore, in a collusive market, the increased inefficiency will prompt banks to narrow product offerings and adopt a “skimming” strategy: extracting rents from “captive” customers, especially in markets where relationship banking dominates. This results in an unchanged loan amount or even a reduced loan amount to amortize the higher costs, but higher prices—in other words, higher loan rates and/or lower deposit rates.
Indeed, we have documented that when faced with rising compensation costs and increased attrition, banks often respond by acting collectively—much like a cartel—raising loan interest rates and trimming deposit rates across the board, irrespective of market competition conditions. Therefore, the burden falls on customers, who end up paying more for loans while earning less on savings. Lending volumes may also shrink, further tightening access to credit.
Banks with greater market power may resort to what the study calls a “skimming strategy”—targeting only the most profitable segments and scaling back broader lending and deposit services.
In the states where courts rejected the IDD, banks responded by raising interest rates on loans. Specifically, banks in the affected states increased their loan rates by between 12.8 and 18.6 basis points and widened their interest margins by roughly 19 basis points compared to banks in the control states. In contrast, deposit rates remained unchanged, suggesting that banks primarily offset higher costs by charging more for loans rather than cutting returns for savers.
The impact depends on the bargaining power of the banks in the product market. In regions where banking is more competitive, banks had a tougher time passing costs onto customers. Banks operating in concentrated markets exhibited the steepest increases in loan rates. Also, in places where borrowers had fewer alternative nearby banking options—say, far from financial hubs or across state lines—loan rates climbed even higher. For example, loan rates rose by an additional 24.2 basis points in areas far from major financial centers. These results imply that banks take advantage of local market power when operational costs spike—raising prices more in areas where borrowers face higher barriers to switching lenders. Furthermore, the effect varied according to the likelihood of employee turnover. Banks employing more mobile workers—those with greater opportunities to move between firms—showed larger increases in loan rates. In other words, the higher the labor mobility, the greater the upward pressure on operating costs, and the more aggressively banks raised prices.
Not all borrowers were hit equally. Our evidence shows an uptick in real-estate loans focused on nonfarm and nonresidential properties, while residential-mortgage volumes remained flat. Consumer and commercial lending also showed no notable changes. These findings suggest that banks are selectively expanding credit in more profitable or less rate-sensitive markets rather than increasing lending across the board.
The rate hikes were also most pronounced in shorter-term loan products, including mortgages with maturities under four years and auto loans under two years. This pattern points to a targeted repricing strategy: Banks are more willing to raise rates on short-term credit—whereby customers may be less sensitive to rate changes—while keeping long-term borrowing costs stable to maintain demand for predictable financing.
And what about risk? While the overall risk profiles of new loans remained stable, there was a notable shift in composition. Risk increased modestly in commercial and industrial (C&I) loans as well as nonresidential real estate, while residential- and consumer-loan risk remained unchanged.
Overall, the ultimate costs of shifting labor-market dynamics appear to be borne by customers. As legal restrictions on employee mobility weaken, banks are being forced to reassess how they manage rising operational costs—and increasingly, the solutions are reflected in consumers’ loan and deposit terms.
The big picture is sobering: When the legal landscape tips in favor of labor mobility, banks face rising cost pressures, and they respond by strategically adjusting pricing and targeting customers and loan segments where they have the most power. For borrowers, especially those with high switching costs or in markets with limited competition, that means fewer choices and more expensive credit.
So, while mobile workers may celebrate their new freedoms, borrowers might be footing the bill.
Endnote
The full paper is available via: SSRN: https://papers.ssrn.com/abstract=5202392.