Deregulation

What Is Deregulation?

Deregulation is the reduction or elimination of government power in a particular industry, usually enacted to create more competition within the industry. Over the years, the struggle between proponents of regulation and proponents of government nonintervention has shifted market conditions. Historically, finance has been one of the most heavily scrutinized industries in the United States.

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Deregulation

Understanding Deregulation

Proponents of deregulation argue that overbearing legislation reduces investment opportunity and stymies economic growth, causing more harm than it helps. Indeed, the U.S. financial sector wasn’t heavily regulated until the stock market crash of 1929 and the resulting Great Depression. In response to the country’s greatest financial crisis in its history, Franklin D. Roosevelt’s presidential administration enacted many forms of financial regulation, including the Securities Exchange Acts of 1933 and 1934 and the U.S. Banking Act of 1933, otherwise known as the Glass-Steagall Act.

The Securities Exchange Acts required all publicly traded companies to disclose relevant financial information and established the Securities and Exchange Commission (SEC) to oversee securities markets. The Glass-Steagall Act prohibited a financial institution from engaging in both commercial and investment banking. This reform legislation was based on the belief that the pursuit of profit by large, national banks must have spikes in place to avoid reckless and manipulative behavior that would lead financial markets in unfavorable directions.

Deregulation proponents argue that overbearing legislation reduces investment opportunity and stymies economic growth, causing more harm than it helps.

Over the years, proponents of deregulation steadily chipped away at these safeguards until the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which imposed the most sweeping legislation on the banking industry since the 1930s. How did they do it?

The History of Deregulation

In 1986, the Federal Reserve (Fed) reinterpreted the Glass-Steagall Act and decided that 5% of a commercial bank’s revenue could be from investment banking activity. In 1996, that level was pushed up to 25%. The following year, the Fed ruled that commercial banks could engage in underwriting, the method by which corporations and governments raise capital in debt and equity markets. In 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act was passed, amending the Bank Holding Company Act of 1956 and the Federal Deposit Insurance Act, to allow interstate banking and branching.

Later, in 1999, the Financial Services Modernization Act, or Gramm-Leach-Bliley Act, was passed under the watch of the Clinton administration and overturned the Glass-Steagall Act completely. In 2000, the Commodity Futures Modernization Act prohibited the Commodity Futures Trading Commission from regulating credit default swaps and other over-the-counter (OTC) derivative contracts. In 2004, the SEC made changes that reduced the proportion of capital that investment banks have to hold in reserves.

This spree of deregulation, however, came to a grinding halt following the subprime mortgage crisis of 2007 and the financial crash of 2007–2008, most notably with the passage of the Dodd-Frank Act in 2010, which restricted subprime mortgage lending and derivatives trading.

However, with the 2016 U.S. election bringing both a Republican president and Congress to power, then-President Donald Trump and his party set their sights on undoing Dodd-Frank. In May 2018, Trump signed a bill that exempted small and regional banks from Dodd-Frank’s most stringent regulations and loosened rules put in place to prevent the sudden collapse of big banks. The bill passed both houses of Congress with bipartisan support after successful negotiations with Democrats.

Trump had said that he wanted to “do a big number” on Dodd-Frank, possibly even repealing it completely. However, former Rep. Barney Frank (D-Mass.), its co-sponsor, said of the new legislation, “This is not a ‘big number’ on the bill. It’s a small number.” Indeed, the legislation left major pieces of Dodd-Frank’s rules in place and failed to make any changes to the Consumer Financial Protection Bureau (CFPB), which was created by Dodd-Frank to police its rules.

What Are the Effects of Deregulation?

The hoped-for effects of deregulation are to increase investment opportunities by eliminating restrictions for new businesses to enter markets and increase competition.

Increasing competition encourages innovation, and as companies enter markets and compete with each other, consumers can enjoy lower prices.

Lessening the need to use resources and capital to comply with regulations allows corporations to invest in research and development.

Without needing to comply with mandated restrictions, businesses will develop new products, set competitive prices, employ more labor, enter foreign countries, buy new assets, and interact with consumers without the need to obey regulations.

What are the most regulated industries in the United States?

The most regulated industries in the United States are:


  • Petroleum and coal product manufacturing
  • Electric power generation, transmission, and distribution
  • Motor vehicle manufacturing
  • Non-depository credit intermediation
  • Depository credit intermediation
  • Scheduled air transportation
  • Fishing
  • Oil and gas extraction
  • Pharmaceutical and medicine manufacturing
  • Deep sea, coastal, and Great Lakes water transportation

What would happen if there were no federal regulations in the U.S.?

Hazards would increase for people taking medicine, driving cars, eating food, and using other consumer products that were no longer subject to regulated safety standards.

Workplaces would lack safe environments or conditions. Weekends and overtime might be eliminated, forcing employees to work long hours or face the prospect of losing their jobs. For example, rivers and other bodies of water could become heavily polluted and even catch fire, as they did before the passage of the Clean Water and Environmental Protection acts in 1970.

What are some benefits to deregulation?

Deregulation can help economic growth thrive. It is thought that by permitting firms to run their business how they prefer, they are able to be more efficient. There are no rules that specify that they can only run their factories for a set number of hours per day or use specific materials in production.

When the company does not need to pay legal fees to ensure that it is in compliance, there is more available capital to use for investing in labor or new equipment. Companies can also lower their fees and thus attract more customers.

In sectors such as airlines and telecommunications, deregulation has increased competition and lowered prices for consumers.

As deregulation takes effect, it reduces barriers to entry. New businesses don’t have as many fees or regulatory considerations, so it is less expensive to enter markets.

The Bottom Line

Deregulation lowers costs of operations, allows more businesses to enter a market, and lowers prices for consumers. These factors can help stimulate efficiency and lead to increased economic growth.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. U.S. Securities and Exchange Commission. "Speech by SEC Commissioner: Securities Regulation After Glass-Steagall Reform."

  2. U.S. Securities and Exchange Commission-Investor.gov. "The Laws that Govern the Securities Industry."

  3. Federal Reserve Bank of San Francisco-Economic Research. "Cracking the Glass-Steagall Barriers."

  4. Board of Governors of the Federal Reserve System. "Regulation H-Section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act."

  5. Financial Reserve History. "Financial Services Modernization Act of 1999, Commonly Called Gramm-Leach-Bliley."

  6. Commodity Futures Trading Commission. "Congress Passes Commodity Futures Modernization Act."

  7. U.S. Securities and Exchange Commission. “Final Rule: Supervised Investment Bank Holding Companies (Corrected Version).”

  8. U.S. Securities and Exchange Commission. "17 CFR Parts 229 and 249-Conflict Minerals; Proposed Rule."

  9. Washington Post. "Congress Approves Plan to Roll Back Post-Financial-Crisis Rules for Banks."

  10. Mercatus Center-George Mason University. "The McLaughlin-Sherouse List: The 10 Most-Regulated Industries of 2014."

  11. U.S. Fish & Wildlife Service. "Federal Water Pollution Control Act (Clean Water Act)."

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