The Hockey Stick of Banking Regulation

Since the early days of the financial crisis, we've heard from many sources that it was caused by deregulation in the financial sector. Some economists and commentators blamed the crisis on general deregulation, while others pointed to the repeal of specific regulations over the last couple of decades as potential causes.

Recently, the Mercatus Center published RegData, which is a comprehensive measurement of regulatory restrictions by industry and by regulator. This index gives us a better picture of the regulatory environment at the industry level. I've referred to RegData in previous posts about EPA and USDA regulation of agriculture (here, here, here, here, and here).

In this post I provide some graphs and a brief discussion of banking regulation since 1970. This is an especially important issue in agriculture since ag lenders are likely to face liquidity issues due to low farm profits in coming years. 

The RegData index is generated by counting the number of restrictive words in a part of the Code of Federal Regulations (CFR) such as "shall," "must," or "cannot," then weighting the restrictive word count by the probability that a given regulation applies to the industry in question. (more info here) 

The first two graphs in this post include regulations from Title 12 of the CFR on Credit Intermediaries (NAICS code 522), which includes rural community banks. As of 2014, Title 12 regulators include the Bureau of Consumer Financial Protection, Farm Credit Administration, Farm Credit System Insurance Corporation, Federal Deposit Insurance Corporation, Federal Financial Institutions Examination Council, Federal Housing Finance Board, Federal Reserve Board of Governors, Financial Stability Oversight Council, National Credit Union Association, Office of Assistant Secretary for Equal Opportunity - Dept. of Housing and Urban Development, Office of the Comptroller of the Currency, Office of Thrift Supervision - Dept. of Treasury, and Office of the Secretary - Dept. of Treasury. 

The graph below shows the RegData index for Title 12 of the CFR from 1970 to 2007. Regulation increased more than threefold from 1970 to 1980. From 1982 to 1985, regulation fell and didn't rise again until 1990. From 1990 to 2007, banking regulation was basically flat, and was about 4 times higher in 2007 than it was in 1970.

click to enlarge

But the Dodd-Frank Act, possibly the biggest law ever, changed things. The graph below extends the data in the graph above through 2014. Dodd-Frank was passed in 2010 and, as you can see, regulation on lenders skyrocketed in the years after its passage. From 2010 to 2014, bank regulation increased by a factor of nearly 2.5. Banking regulation increased as much in the 31 years from 1970 to 2001 as it did from 2002 to 2014; it quadrupled in both time periods.

click to enlarge

Another popular measure of regulation is word count. The graph below shows the word count of all regulations in Title 12 of the CFR without the weighting for the credit intermediaries industry. The sharp increase is still visible but is not as dramatic.

Brady Brewer, a colleague at the University of Georgia, and I are in the process of writing a paper evaluating the effects of Dodd-Frank on small community lenders. I'll be writing more on that paper as we progress. For now, I hope the reader comes away with a better understanding of the recent history of banking regulation and an appreciation for just how dramatic and unprecedented Dodd-Frank is. In a recent post, John Cochrane gave an example of the real-world effects of these regulations. After reading his post, I didn't come away with the impression that these regulations help the average person.

click to enlarge