The term deregulation is frequently used in the financial sector to refer to a reduction in banking regulation. Regulatory laws that restrict banks are put into place for a number of different reasons, but most often it is to encourage economic stability. These laws are typically removed in an effort to spur economic growth. Since the Great Depression, America’s financial history has been marked by a series of shifts between regulation that attempts to protect the economy and deregulation that gives the banking industry more self-authority.
The term deregulation, when specifically applied to the banking industry, often refers to policies which allow financial institutions to assume a greater level self-authority and, at times, risk in their activities without incurring penalties from the federal government.
The Great Depression and Regulation
The United States underwent a national banking crisis and there was a worldwide economic downturn during the period known at The Great Depression from 1929 until the late 1930s. The economic emergency was exacerbated in the U.S. by a large volume of bank failures due to unpaid loans made for stock market speculation. In the midst of the depression, with national unemployment at 25 percent and losses to bank depositors estimated at about $1.3 billion, President Franklin Roosevelt signed the Banking Act of 1933. This act extended federal oversight to commercial banks and created the Federal Deposit Insurance Agency to guard against future bank failures. The Glass-Steagall Act, which prohibited commercial banks from securities trading, was part of the Banking Act.
Financial Deregulation in the 1980s
The Savings and Loan industry, which focuses mainly on taking deposits from savers and making mortgage loans, was experiencing an erosion of capital during the 1980s due to an imbalance between money taken in as interest on mortgages and money paid out as interest to depositors. The U.S. Congress responded with the Depository Institutions Deregulation and Monetary Control Act of 1980. This act changed some of the regulations instituted by the Banking Act of 1933. Two years later, the Garn-St. Germain Depository Institutions Act gave the industry more authority to do commercial lending, issue credit cards and participate in the mutual funds market, deregulating it further. In 1984, deregulation led to the failure of dozens of banks and the Savings and Loan industry. The failures continued until the mid-1990s.
Regulating Consumer Protection in 2010
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was enacted to provide additional regulatory protection for customers of financial services provided by banks and credit unions. The act established the Consumer Financial Protection Bureau in response to the subprime mortgage crisis that began in 2006, as well as the growth in payday lenders, harassment by debt collectors, financial scams targeting seniors and the burden of debt carried by people in their 20s.
Dodd-Frank Rollbacks in 2018
In the years following passage of the Dodd-Frank act, many legislators believed that smaller regional banks and credit unions were being penalized for problems caused by the largest financial institutions. The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 is a reaction to restrictions put into place by Dodd-Franks. It relieves mid-size banks from running under federal oversight by raising the capital assets threshold from $50 billion to $250 billion. Banks with more than $10 billion in assets will be exempted from the Volcker Rule, a portion of Dodd-Frank which imposes restrictions on proprietary trading and on the percentage of bank income that is being paid out in dividends. The new law also requires the Federal Reserve to take the size of institutions into account when creating future regulations instead of taking a one size fits all approach.