Tag: Phil Gramm

The Banking Deregulation that Mattered (and Actually Happened)

One commonly heard refrain is that the deregulation of banking caused the financial crisis.  To those of us that have actually spent years working on banking policy, such a claim is met with surprise.  What banking deregulation?  The usual response, with generally an absolute lack of detail or argument, is the repeal of Glass-Steagall by the Gramm-Leach-Bliley Act (GLB).  When the proponents of this claim bother to offer any explanation (in some circles simply invoking the name “Phil Gramm” substitutes for any analysis), it usually goes like this:

With Glass-Steagall dead and gone, financial institutions were now free to grow large.

That’s taken from the recent book Reckless Endangerment.  What it misses that is that Glass-Steagall placed zero constraints on the size of banks.    

The following graph shows the share of total commercial bank assets held by banks over $10 billion in assets.  Its been quite a change, and obviously one toward growing concentration.  But was this caused by GLB?  Recall GLB was not signed into law until 1999.  By 1999 the share of assets held by the largest banks was already 65%, at the height of the bubble in 2005 it had risen to 73%.  

What could have contributed to this increase? Perhaps, just maybe, the removal of branch banking restrictions in the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Prior to the passage of Riegle-Neal many states had substantial restrictions on the number of branches a bank could have, which severelylimited the size of banks. In Texas for instance, banks were limited to a single location.

Before the passage of Riegle-Neal, the large bank share of assets stood at 38%.  In the few years, between its passage and that of GLB, this 38% shot up to 65%.   Far more than GLB, Riegle-Neal was the legislative driver of commercial bank consolidation.  But then a banking deregulation passed by a Democratic Congress and signed by a Democratic president just doesn’t garner the blind emotion of blaming everything on Phil Gramm.

It should, of course, be said that  the removal of branching banks restrictions was a great thing.  There is a substantial body of academic work supporting the notion that such restrictions increased the risk of the banking system.  Because of Riegle-Neal we had a safer banking system than we would have had otherwise.  It was indeed a deregulation — one that matter and one that vastly improved our financial system.

Thursday Links

  • DON’T FORGET: Our fiscal policy conference, “The Economic Impact of Government Spending,” featuring Senators Bob Corker (R-Tenn.) and Mike Lee (R-Utah), former Senator Phil Gramm (R-Tex.), Representative Kevin Brady (R-Tex.), and other distinguished guests, begins at 2:00 p.m. Eastern today. Please join us on the web–you can watch the conference LIVE here.
  • Atlas Shrugged Motors presents the Chevy Volt.
  • The parable of the Good Samaritan teaches us about the moral value of voluntary charity toward the needy–it says nothing about using coercive government programs of the modern welfare state.
  • It is not the role of the Court to rewrite laws for Congress.
  • The failed “war on drugs” has reshaped our budgets, politics, laws, and society–and for what?

Wednesday Links

  • Please join us on Thursday, April 7 at 2:00 p.m. ET for “The Economic Impact of Government Spending,” featuring Sen. Bob Corker (R-TN), Sen. Mike Lee (R-UT), Rep. Kevin Brady (R-TX), former Sen. Phil Gramm, former IMF director of fiscal affairs department Vito Tanzi, and Ohio University economist and AEI adjunct scholar Richard Vedder. We encourage you to attend in person, but if you cannot, you can tune in online at our new live events hub.
  • The last time we saw a green energy economy was in the 13th century.
  • This isn’t quite what we meant by “defense spending.” For a refresher, see this itemized list of proposed cuts that could save taxpayers $150 billion annually.
  • Prosperity reigns where taxes are low and right to work prevails.”
  • In case you missed it last Friday, check out Cato director of financial regulation studies Mark A. Calabria discussing the Federal Reserve on FOX News’s Glenn Beck show: