Did Deregulation Cause the Financial Crisis? An Update Using RegData 3.0
Patrick McLaughlin, Oliver Sherouse, and Michael Gasvoda
Seven years ago, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. Previously, we examined the claim that deregulation was a major cause of the 2008 financial crisis and that Dodd-Frank was a necessary step to remedy the harmful effects of this deregulation. Our findings showed that regulations did not in fact decrease leading up to 2008, but instead substantially increased.
Using RegData 3.0, the newest version of our RegData dataset (available at QuantGov.org), we have updated our earlier findings. RegData identifies regulatory restrictions by counting the number of restrictive words and phrases—such as may not, must, shall, prohibited, and required—in the Code of Federal Regulations (CFR). The new data in the expanded analysis reinforce the findings of the previous one: bills that ostensibly deregulated the financial sector, such as the Gramm-Leach-Bliley Act of 1999, the Commodity Futures Modernization Act of 2000, and the Financial Services Regulatory Relief Act of 2006, had little to no effect on the steady growth in financial regulation overall. That growth is shown in the figure above.
In fact, RegData shows that between 1997 and 2008, the number of financial regulatory restrictions in the CFR rose from 40,067 to 47,508—an increase of 18.6 percent. And because the new version, RegData 3.0, looks further back in time than before, we can now see a long trend of regulatory expansion over the period 1970–2016, the entire time period for which we have data. In 1970, restrictions in the CFR titles that were most relevant to finance numbered 13,594; thus, the total increase in regulatory restrictions over 38 years is 250 percent. Regulatory restrictions in Title 12 of the CFR, which covers banking, increased by 266 percent over that time span, whereas the number of restrictions in Title 17, which regulates commodity futures and securities markets, increased by 228 percent.
This analysis demonstrates that there was no meaningful decrease in regulatory restrictions in the period leading up to the financial crisis. On the contrary, the crisis was preceded by nearly four decades of steadily increasing regulation. These findings build upon a growing body of research demonstrating the need to reexamine the underlying assumptions behind major regulatory expansions such as the one spurred by Dodd-Frank. For a wide-ranging look at financial regulation, including alternatives to top-down approaches, see the Mercatus Center’s recent book Reframing Financial Regulation: Enhancing Stability and Protecting Consumers.