Regulation and Deregulation of the U.S. Banking Industry: Causes, Consequences, and Implications for the Future
The banking industry has been subject to extensive government regulation covering what prices they can charge, what activities they can engage in, what risks they can and cannot take, what capital they must hold, and what locations they can operate in. This chapter summarizes the evolution of these regulations, with a focus on those put into place in the 1930s and later removed in the last part of the 20th century. The authors argue that regulatory change was driven by technological, legal, and economic shocks that affected competition among different groups. The role of both private and public interests play a key role in the analysis. The authors also describe the consequences of certain types of banking regulation and deregulation for both the financial services industry and the economy. The industry adapted to the regulatory constraints imposed in the 1930s, thus partially reducing the costs of regulatory distortions. On the one hand, banking efficiency increased following deregulation, and this generated some benefits for the economy as a whole. On the other hand, some aspects of market adaptations also led to the emergence of shadow banking and increasingly opaque interconnections within the financial system that contributed to the fragilities that resulted in the 2008 financial crisis.
The paper was completed and presented in 2005. Between then and when the paper was updated for publication with the addition of an epilogue, I had speaking engagements at financial services organizations for which I was compensated.