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Did Deregulation Cause the Financial Crisis? Examining a Common Justification for Dodd-Frank
From Mercatus.
"The Dodd-Frank Wall Street Reform and Consumer Protection Act was
signed into law about two years after the financial crisis of 2008.
Deregulation of the financial services sector in the years leading up to
the 2008 crisis was—and still is—used to justify Dodd-Frank’s
substantial regulatory burdens. But financial regulation did not
decrease in the decade leading up to the financial crisis—it increased.
Using RegData, we find
that between 1997 and 2008 the number of financial regulatory
restrictions in the Code of Federal Regulations (CFR) rose from
approximately 40,286 restrictions to 47,494—an increase of 17.9 percent.
Regulatory restrictions in Title 12 of the CFR—which regulates
banking—increased 18.2 percent while the number of restrictions in Title
17—which regulates commodity futures and securities markets—increased
17.4 percent.
RegData measures
regulatory restrictions by counting the number of restrictive words and
phrases—such as “may not,” “must,” “shall,” “prohibited,” and
“required”—in each title of the CFR. Developed by Patrick A. McLaughlin
and Omar Al-Ubaydli, RegData is computer-based and thus only able to
calculate regulatory restrictions for 1997 and subsequent years because
electronic copies of the complete, annual CFR are publicly available
from the Government Printing Office for only that time period.
Total regulatory restrictions pertaining to the financial services
sector grew every year between 1999 and 2008, increasing 23 percent
during this time. The Patriot Act, the Sarbanes-Oxley Act, and
Regulation NMS all contributed to this growth. The repeal of parts of
the Glass-Steagall Act via the Gramm-Leach-Bliley Act did not result in
noticeable deregulation of the financial services sector. Nor did the
Commodity Futures Modernization Act facilitate overall financial
deregulation. Not even the Financial Services Regulatory Relief Act of
2006, legislation intended to decrease regulatory burdens on the
financial industry, reversed the ever-growing burden of regulatory
restrictions faced by the financial services sector in the years leading
up to the financial crisis.
Net decreases for Title 12 regulatory restrictions between 1997 and
1999 largely reflect an effort to streamline regulatory text. Only the
FDIC portion (volume 4) of Title 12 experienced a significant decrease
in pages between 1997 and 1998, and it was almost entirely isolated
within 12 C.F.R. § 335, which was shortened from 136 to 7 pages in an
effort to streamline FDIC regulations with pertinent SEC Securities
Exchange Act regulations. Similarly, the comparatively small decrease in
overall regulatory restrictions in Title 12 between 1998 and 1999 is in
large part attributable to the Federal Reserve’s 1999 consolidation of
Regulation G—which pertained to nonbanks’ extension of leverage for the
purpose of purchasing certain securities—with Regulation U, which was
revised to be applicable to both banks’ and nonbanks’ extension of
leverage. Without this consolidation, Title 12 pages would have
increased between 1998 and 1999. Neither of these episodes had any
relation whatsoever to Gramm-Leach-Bliley or the Commodity Futures
Modernization Act.
As we show in this analysis, financial regulatory restrictions
increased 17.9 percent in the years leading up to the crisis. Without
the streamlining efforts of the late 1990s—which reduced duplicative
regulatory text and were unrelated to the acts of Congress typically
blamed for alleged deregulation—this figure would likely be even higher.
In Dodd-Frank: What it Does and Why it’s Flawed,
we used the RegData methodology to estimate that Dodd-Frank will cause a
26 percent increase in financial regulatory restrictions. Policymakers
should reexamine the presumption that Dodd-Frank’s substantial
regulatory restrictions are necessary to offset previous deregulation of
the financial services sector. On net,RegDatashows
that no such deregulation occurred. In fact, the financial sector was
increasingly regulated over the decade leading up to the financial
crisis.
"
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