Did Deregulation End the “Quiet Period” of Low-Risk Banking?
Publisher
CLS Blue Sky Blog
Date
2018-9-18
From the New Deal until the 1970s, banks were on a tight leash. Regulators controlled the rate of interest they could pay on deposits. Banks could not underwrite or deal in corporate securities. With some exceptions, they could not expand geographically.
These restrictions were gradually eliminated beginning in the 1970s. Simultaneously, banking grew riskier. From the end of World War II to 1970, bank failures were virtually nonexistent. From that time on, the U.S. experienced waves of bank distress culminating in the financial crisis of 2007-09.
It is tempting to conclude that the deregulation caused the instability. I believe, however, that this confuses correlation with causation. The evidence supports a different causal story: Macroeconomic instability unrelated to banking regulation made banks riskier. Regulators responded by loosening regulatory restrictions that were viable in an era of stable inflation and interest rates but had become untenable during the Great Inflation of the 1970s. This post will provide a brief summary of the argument that regulatory change did not cause the end of the “quiet period” of low-risk banking and, in particular, did not cause the financial crisis of 2007-09.
Citation
Paul G. Mahoney, Did Deregulation End the “Quiet Period” of Low-Risk Banking?, CLS Blue Sky Blog (September 18, 2018).