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 no government intervention have shifted market conditions. Finance has historically been one of the most heavily scrutinized industries in the United States.
BREAKING DOWN Deregulation
Many forms of financial regulation, including the Securities Exchange Acts of 1933 and 1934, and the U.S. Banking Act of 1933, were enacted by Franklin D. Roosevelt's administration in response to the stock market crash of 1929 and subsequent depression.
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 Banking Act of 1933, otherwise known as the Glass-Steagall Act, prohibited a financial institution from engaging in both commercial and investment banking. This reform legislation was based on the belief 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.
Process of Deregulation
Proponents of deregulation argue that overbearing legislature reduces investment opportunity and stymies economic growth, causing more harm then it helps. These forces steadily chipped away at regulations up until the Dodd-Frank act of 2008, which imposed the most sweeping legislation on the banking industry since the 1930's.
In 1986, the Federal Reserve reinterpreted the Glass-Steagall Act and decided that 5% of a commercial bank's revenue could be from investment banking activity, and the level was pushed up to 25% in 1996. The following year, the Fed ruled that commercial banks could engage in underwriting, which is 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, overturning the Glass-Steagall Act completely. In 2000, the Commodity Futures Modernization Act prohibited the Commodity Futures Trading Committee from regulating credit default swaps and other over-the-counter 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 financial crash of 2008, most notably with the passing of the Dodd-Frank Act in 2010, which made restrictions on subprime mortgage lending and derivatives trading.