Financial deregulation can refer to a variety of changes in the law which allow financial institutions more freedom in how they compete. Whether such changes are beneficial or harmful to the economy as a whole has been widely debated. It is important to note that financial deregulation does not mean removing all rules or regulations.
The best known form of financial deregulation in the United States came in 1999 when Congress repealed sections of the Glass-Steagall Act. This act, passed in 1933 during the depression, meant that any one company could only act as a commercial bank, an investment bank or an insurance company. A commercial bank offered savings and loans services to customers, while an investment bank carried out functions such as selling securities, trading in foreign currencies and assisting firms in mergers.
The repeal of this act meant firms could now carry out the functions of two or all three of these types of institution. One of the main arguments in favor of repealing the act in this way was that it would limit the effects of economic cycles on individual firms. For example, people are more likely to save during a downturn, but more likely to invest when they are better off. Financial deregulation would therefore theoretically mean firms could grow in size and bring in business more consistently.
It was also argued that deregulation would make firms more competitive. They would be able to work more efficiently, particularly where two firms from different sectors merged and pooled their resources. This could also help business as a whole because the competition and efficiency would make it cheaper for companies to obtain funding for capital investment.
Critics of financial deregulation have argued that it either caused or fuelled the banking crisis which began in 2007. They say that removing the barriers between different types of financial institutions caused conflicts of interest. For example, a company which had previously been a commercial bank, and had many consumer and business customers, might now take too many risks because it was trying to compete in the investment and insurance sectors. Critics have also argued that deregulation allowed individual financial institutions to become so big that government would have to step in when they struggled rather than let them fail and risk damaging the entire economy.
Another form of financial deregulation took place in the United Kingdom involving building societies. These are financial institutions which were owned by their customers rather than shareholders and specialised in mortgage lending. After building societies began to compete more directly with banks in the 1980s, the government changed the law to allow them to demutualize. This meant that, if the society’s members agreed in a vote, it could change into a limited company. Since that time, every building society which demutualized has either been bought out by a bank or has been taken over by the government after experiencing financial difficulties.
