Financial Regulations: Glass-Steagall to Dodd-Frank

There is a variety of ideas on regulating the market. Many say the market should regulate itself while others argue the government should regulate the financial markets. A few claim that self-regulation is the best option.

Over the years, there have been many financial regulations. These are used to help mitigate stock market crashes, ensure that the customer is being treated fairly and deter those bent on scamming the system. Here are the significant financial regulations from the past century or so, and how they help the market, and the individuals.

October 29, 1929, is infamously known as Black Tuesday. The Great Crash that occurred on that date acted as a catalyst for the Great Depression that affected millions of lives across the U.S. As the country fought to get the economy back on track, many regulations were passed to curb another depression. One of those was the Banking Act of 1933, more commonly known as the Glass-Steagall Act (GSA).

Many people agreed that the stock market collapse, which took the Dow from a high of 381.17 on September 3, 1929, to a low of 41.22 on July 8, 1932, was the result of banks being overzealous with their investments. The idea was that commercial banks were taking on too much risk with their money, and their clients’ money.

The GSA made it harder for commercial banks, which were in the business of lending money, to invest speculatively. Banks were limited to making just 10% of their income from investments (except government bonds). The goal was to put limitations on these banks to prevent another collapse. The regulation was met with a lot of backlash, but it held firm until repeal in 1999.

Part of the GSA was to set up the Federal Deposit Insurance Corporation (FDIC). The FDIC was made a permanent structure in The Banking Act of 1935. This significant regulation did more than that, though. It helped to establish the Federal Open Market Committee (FOMC), the key player in monetary policymaking, and restructured the board members of the reserve bank and how those committees were run.

The effects of this are so entrenched in our current money and financial policy that it’s hard to see the system functioning without this act. By establishing these boards, the money making decisions are removed from politics. This means if Republicans, Democrats, Independents, or another party end up controlling the White House, they can’t control the nation's money policies.

Although the FDIC was established in 1933/1935, the insurance that we know our deposits get today was not fully developed until 1950. The Federal Deposit Insurance Act of 1950 made it so that deposit insurance is backed by the full faith and credit of the United States government.

This is not to say that deposits were not insured back in 1933. Rather, they were insured differently. Over time, the insurance amount has changed to keep up with inflation. In 1934, when the original insurance went into effect, people were covered for $2,500. Today, that amount has been raised to $250,000.

During the 1980s, the U.S. went through a savings and loan crisis. This crisis is one of the largest financial scandals in U.S. history and is an enormous contributing factor to the high-interest rates of the 1980s. During this decade, people were moving their money from savings and loan institutions, and moving it into money market funds to escape Regulation Q (a regulation that capped the amount of interest a depositor could earn at a savings and loan institute). To try to win back depositors, the savings and loans started investing in riskier investments all the while being backed by the Federal Savings and Loan Insurance Corporation (the FDIC for savings and loans institutions). The result was a financial crisis.

The reaction was to enact the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). This act helped to establish the Resolution Trust Corporation to close thrifts that were no longer solvent. It also helped to repay depositors that lost money during the process.

In all, it streamlined the savings and loans process and helped shape how our money is deposited and earns interest today.

Part of the FIRREA was to have savings and loans backed by the FDIC. This act in 1991 helped to strengthen the power of the FDIC by allowing them to guarantee deposits in savings and loans institutions. It also allowed the FDIC to borrow from the Treasury if they had a large claim.

The Great Recession is a financial crisis many of us are very familiar with. It is the most recent crisis that has resulted in many regulations, a significant amount of backlash, and a push for more power for the consumer. The Great Recession was spurred by the mortgage crisis and was wrapped up relatively quickly despite its size.

One result of the crisis was the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The act encompasses a wide variety of different regulations and laws, all of which strive for one goal:“To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end “too big to fail,” to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.”

The establishment of the Consumer Financial Protection Bureau (CFPB) has a significant impact on consumers. This department is the advocate for the consumer. They are the watchdogs to help prevent abuse of the laws, and to make sure that the consumer is not taken advantage of.

These are a few of the major regulations that have gone into effect throughout the past century. They are some of the biggest regulations that have helped shape our monetary policy, economic policy, investment policy, and how money works overall in the United States. As a consumer, we can trust our financial advisors, bankers, Federal Reserve, and CFPB because of the oversight these regulations have provided.

Even if some don’t work out as intended, they can be repealed, adjusted, or modified. In the end, the aim of these regulations is to make the economy more stable and to make sure the consumer is the driving force. (Read more on the topic, here: What Was The Glass-Steagall Act?).