Recent Financial Regulation

Over the past century financial turbulence and the human suffering it has caused have led to significant legislation aimed at bringing order to the world of banking.

The stock market crash of 1929 and the ensuing Great Depression gave birth to new regulatory agencies, including the Federal Deposit Insurance Corporation (FDIC) and the Securities and Exchange Commission (SEC). In 1933 the Glass-Steagall Act was enacted, which restricted commercial banks from securities transactions.

In the late 1980s and the early 1990s, turmoil in the financial world and the housing market led to the closing of half of the Savings and Loans Associations in the country. S&Ls, financial institutions primarily involved with home mortgages, were squeezed between long-term mortgages which they had offered at relatively low interest rates and the rising interest rates which were necessary to attract deposits. At the same time, reduced regulation allowed them to enter into financial areas about which they had scant experience and expertise. Fraud and a downturn in the housing market added to their problems. In response, Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), which had the effect of increasing oversight in that part of the economy.

In the banking sector, pressure was growing to allow new consolidation and streamlining. The 1999 Gramm-Leach-Bliley Act repealed part of Glass-Steagall and allowed commercial banks to affiliate with securities firms.

In the wake of the financial collapse of 2008 and the Great Recession, a number of governmental entities and areas of the country has undergone especially dire financial straits. The Commonwealth of Puerto Rico has lost the ability to service its debts. A number of cities including Detroit have gone through reorganization. The declining use of coal has severely depleted the tax base of coal mining parts of the nation, and persons with student loans have seen their debts, which can’t be refinanced at lower interest rates, skyrocket. The need for financial institutions targeted toward meeting community needs was growing.

In 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed. Among its many parts were rules to rein in the activities of the banks and to bolster them from failing. One important section, the Volker Rule, imposed new limits on the ability of commercial banks to participate in securities transactions. An unintended consequence of Dodd-Frank was that some of the new requirements increased the cost of compliance for small banks proportionately more than for big ones, leading to a reduction of the number of financial institutions.