Deregulation and the Subprime Crisis

Article — Volume 104, Issue 2

104 Va. L. Rev. 235
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Many popular and academic commentators identify deregulation as a cause of the 2007–2008 financial crisis. Some argue that the Gramm-Leach-Bliley Act (“GLBA”) and the Commodity Futures Modernization Act of 2000 (“CFMA”) removed barriers to risk-taking by commercial and investment banks, while others contend that these statutes limited regulators’ ability to respond to changing market conditions. A more general argument is that stringent regulation of banking from the New Deal to the late 1970s produced a quiet period in which there were no systemic banking crises, but subsequent deregulation led to crisis-prone banking.

This Article examines the deregulation hypothesis in detail and concludes that it is incorrect. The GLBA and the CFMA did not remove existing restrictions that would have prevented the principal practices implicated in the subprime crisis, but instead codified the status quo. Although the two statutes prevented regulators from banning affiliations between commercial banks and securities firms and curbing over-the-counter derivatives markets, those actions would likely not have prevented the crisis or significantly reduced its severity.

The Article further argues that the era of stable banking was the result of a benign and predictable macroeconomic environment, not regulation of deposit interest rates. That era ended with the severe inflation and interest rate volatility of the 1970s. Policymakers had to either ease restrictions on the interest rates banks could pay their depositors or force savers to lend to banks at negative real rates of return. Interest rate risk caused both bank failures and bank deregulation.

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  Volume 104 / Issue 2  

Textualism and Statutory Precedents

By Anita S. Krishnakumar
104 Va. L. Rev. 157

Deregulation and the Subprime Crisis

By Paul G. Mahoney
104 Va. L. Rev. 235

“Was that a Yes or a No?” Reviewing Voluntariness in Consent Searches

By James C. McGlinchy
104 Va. L. Rev. 301