The History of Bank Deregulation

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The Glass-Steagall Act, also referred to as the Banking Act of 1933, placed a number of restrictions on banks, most of which were repealed through the process of deregulation. To fully understand deregulation, it's helpful to first understand why regulatory laws were enacted.

Glass-Steagall Act

The 1929 stock market crash and the Glass-Steagall Act were essentially the bookends to the Great Depression. From 1900 to 1929 the Bank of the United States underwrote corporate stocks, artificially inflating the market. This culminated in the crash, when all banks in the United States closed for four days, with over 4,000 never reopening. This led to a run on the banks, which spawned the Great Depression. The Glass-Steagall Act was passed in direct response to the Great Depression and helped to stabilize and rebuild the nation's economy. It expanded the regulatory powers of the Federal Reserve, prohibited banks from trading in corporate securities and created the Federal Deposit Insurance Corporation (FDIC).

Beginnings of Deregulation

Until the 1970s banking was governed primarily by state laws, and banks could do business only in their home states. A Nebraska bank solicited customers from Minnesota but charged them Nebraska's higher interest rate. Minnesota's Marquette Bank filed a lawsuit to stop this practice, and the case went to the Supreme Court. In its "Marquette Decision," the Court ruled that banks could export interest rates into other states. This prompted banks to establish headquarters in states that would allow them to charge the highest interest rates, and the tax base of those states grew substantially. To stay competitive, other states raised caps on the interest rates banks could charge. This effectively led to the deregulation of state interest laws, also known as usury law.

Depository Institutions Deregulation and Monetary Control Act of 1980

The Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) abolished state caps on interest rates that could be charged for primary mortgages, giving banks the incentive to approve mortgages for people with problematic credit histories. Banks made more money by charging higher rates to riskier customers, and a broader range of people were able to purchase homes.

Alternative Mortgage Transactions Parity Act of 1982

Before the Alternative Mortgage Transactions Parity Act of 1982 (AMTPA), all mortgages were fixed-rate amortizing loans. This legislation opened the doors to nontraditional mortgages, paving the way for adjustable rates, balloon payments, interest-only loans, and optional adjustable rates, which allow borrowers to underpay substantially during the first few years of the loan.

Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (IBBEA) swept away all state barriers to interstate banking. It allowed financial institutions to locate branches in other states and to purchase or merge with banks headquartered in other states.

Gramm-Leach-Bliley Act

The Gramm-Leach-Bliley Act (GLBA), also referred to as the Financial Services Modernization Act of 1999, repealed part of Glass-Steagall, tearing down the walls between banking, insurance and investments. Companies could now merge, partner and operate freely within each other's industries. The act also made it possible for the financial industry to group mortgage and other portfolios, selling them as investments.