Regulatory Accumulation in the Financial Sector

Patrick McLaughlin, Oliver Sherouse, and Stephen Strosko

The finance and insurance sector is one of the biggest sectors in the US economy and one of the most heavily regulated by the federal government. For a long time, it was difficult to quantify the size and scope of regulations affecting the finance and insurance industries, but the advent of the RegData Project made the task much easier. Now, with the release of RegData 3.0, researchers are able to quantify not just the regulations targeting the finance and insurance sector, but also those that affect specific economic subsectors within the finance and insurance sector.

The chart below provides an overarching view of the regulatory restrictions contained in the Code of Federal Regulations that are relevant to the finance and insurance sector. The time series graphs use the North American Industry Classification System (NAICS) to break the sector into its subgroups. The NAICS classifies industries into mutually exclusive and exhaustive categories. There are five levels of the NAICS hierarchy, depending on the granularity of the classification. The broadest level is 2-digit, with the additional levels—the 3-, 4-, 5-, and 6-digit levels—becoming progressively narrower categories of economic activity. The chart displays NAICS level-three-classified subsectors of the finance and banking sector, and the number of regulatory restrictions that are relevant to those subsectors over time, as quantified in the RegData 3.0 dataset.

According to the Bureau of Labor Statistics (BLS), firms in the credit intermediation and related activities industry “lend funds raised from depositors; lend funds raised from credit marketing or borrowing; or facilitate the lending of funds or issuance of credit by engaging in such activities as mortgage and loan brokerage, clearinghouse and reserve services, and check cashing services.” This subsector has 63,256 relevant regulatory restrictions as of 2016, which is more than any other finance and insurance subsector. In addition, this subsector has also seen the largest growth in number of restrictions since 1970.

The next chart paints a similar picture for the 4-digit subsectors, showing the five subsectors with the greatest number of relevant regulatory restrictions. Of these subsectors, the depository credit intermediation subsector appears subject to the most regulatory restrictions as of 2016—67,887, to be exact. The insurance and employee benefit funds subsector is not far behind, with 55,664 relevant regulatory restrictions.

The next chart shows the number of restrictions governing some even more narrowly-defined finance and insurance subsectors. This graph shows the NAICS 5-digit subsectors of the finance and insurance sector, again depicting those five subsectors with the greatest number of relevant regulatory restrictions. At the top of the list is the credit unions subsector. This subsector has 58,744 relevant regulatory restrictions as of 2016, more than twice the number of restrictions as the next subsector, portfolio management, which has 26,551.

The NAICS 6-digit level is the most specific of the NAICS classifications, and, for the first time ever, RegData includes this level of classification when quantifying regulatory restrictions relevant to each NAICS sector or subsector. The next figure shows the top five industries in the finance and insurance sector at 6-digit NAICS level, ranked by the number of relevant regulatory restrictions, as in the previous figures. As of 2016, credit unions are faced by the most relevant regulatory restrictions, with 59,489 restrictions; portfolio management is second, with 24,198; and securities brokerage is third, with 20,422. With RegData 3.0 now covering all levels of the NAICS, researchers now have the tools and data necessary to empirically investigate what effects different levels of restrictiveness might have on even the most narrowly defined subsectors.