US Banking Deregulation: History & Effects

Instructor: Michelle Reichartz

Michelle has lead multiple training initiatives and has a master's degree in Business Administration.

In this lesson, you will learn the history of banking deregulation and how it has changed since the 1970's. The changing of the banking industry has dramatically impacted the health of the economy in various ways.

Putting Your Money Under the Mattress

You're in a conversation with your teenage son about how important it is to be smart with money when the topic of the Great Depression comes up. He starts asking how our most recent financial crisis in 2008 was in comparison to how the Great Depression was in 1930's. Then he asks a question that leaves you asking questions.

'If the stock market crash caused the 1930's depression in the United States, then what caused the depression in 2008?'

Its a great question, but do you know the answer?

Effects of the Great Depression

After the Great Depression put so many American citizens in poverty, the government responded by trying to ensure no such economic crisis would happen in the future. In 1933, the Glass-Steagall Act separated the business of investing & trading by banks from the business of providing services, like checking or savings accounts, to consumers. This effectively separated investing from the rest of banking, which regulated the industry.

That regulation to protect the banking industry began to crumble in 1970, with the Amendments to the Bank Holding Company Act. The new amendments allowed the consumer banks to begin making commercial loans. This was among the first small moves towards deregulation.

The first major deregulation change was in 1978 with the Marquette v. First of Omaha court case. Due to the Supreme Court's decision, banks had the right to make loans in the states that they were not headquartered in. The lenders immediately jumped into creating new loans in states that had the least regulation, including Delaware and South Dakota.

The Crash of the Thrift Banks

In 1980, the Depository Institutions Deregulation and Monetary Control Act changed banking regulation again. Deposit insurance increased to $100,000 and the limitation on interest rates for deposit accounts was eliminated. It also provided additional authority to thrift banks, which are institutions that focus primarily on taking deposits and providing mortgages. They were also known as savings & loan institutions.

Two years later, the deregulation continued with the Garn-St. Germain Depository Institutions Act. The Reagan administration signed the act with approval from both the Democrats and the Republicans. This new act allowed even more freedom to thrift banks, leaving them almost entirely deregulated. It now provided the ability to do commercial lending, along with new accounts that could compete in the mutual funds market.

The impact of this deregulation was felt by 1984. These thrift banks started to crash in Texas as the oil boom started to fail. The crash would cost over half a trillion dollars in losses, some of that picked up by taxpayers. This failure led to the investigation of two major banks, including Lincoln Savings and Loan in 1987 and Silverado Savings and Loan in 1988. The Financial Institutions Reform and Recovery Act was also used to assist in the creation of the Resolution Trust Corporation to assist in dealing with the failed thrift banks.

Easing Regulations on Creditors

The next major deregulation in the banking industry came in 1996, when the Federal Reserve reinterpreted the Glass-Steagall Act. This new interpretation allowed bank holding companies to to earn up to 25% of their revenue from investment banking.

In 1998, Citicorp, a commercial bank, merged with Travelers, an insurance company with an investment bank. The merge required the new company to sell off the insurance business and the CEO campaigned to repeal the Glass-Steagall Act in order to make it easier for the Federal Government to approve the merger. His campaign cost $12 million.

The biggest move came the next year, when the Glass-Steagall Act was repealed completely. The repeal was done using the Gramm-Leach-Bliley Act. In response to the repeal, a flood of mergers between banks, insurance, and security companies occurred. The banking and insurance industry spent over $350 million to get the act successfully repealed.

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