U.S. Congress Deregulates Banks and Savings and Loans

Deregulation in the banking and thrift industries redefined the roles of financial institutions and encouraged intense competition in financial markets.


The larger, more aggressive thrifts welcomed DIDMCA. They saw potential profit in the ability to include shorter term consumer loans in their portfolios. Disintermediation was their biggest threat, so the demise of Regulation Q was welcomed. Not all smaller banks and thrifts were happy with DIDMCA. Many were not anxious to compete for high-cost funds and then enter into unfamiliar loan arrangements. There was another group of DIDMCA “losers”—banks that were not members of the Federal Reserve system. They were forced to place reserves into non-interest-bearing accounts. In return, they received the authority to purchase services from the Fed. They saw this as a poor trade. Depository Institutions Deregulation and Monetary Control Act (1980)

In the first year after passage of DIDMCA, interest rates remained extremely high. This was a poor environment for institutions to test their new competitive powers. Consequently, the problems of disintermediation and thrift losses did not improve. Even the more extensive lending powers provided by the Garn-St. Germain Act did not have an immediate effect. One tool that did have an impact fairly quickly was the provision allowing money-market depository accounts (MMDAs). Money-market mutual funds had amassed more than $230 billion in accounts by 1982, mainly at the expense of banks and thrifts. At the end of 1982, depository institutions began attracting many of these funds back through MMDAs. By the end of 1983, MMDAs represented about 16 percent of the total deposits at banks and thrifts. Total deposits in MMDAs overtook deposits in money-market mutual fund accounts.

There was a negative side to this “success.” The legacy of deregulation will be that it created an era of expensive funds at depository institutions. Deregulation made it possible for banks and thrifts to compete, but shrinkage of margins between lending and borrowing rates made institutions vulnerable to failure. In the years following passage of the Garn-St. Germain Act, the number of bank and thrift failures was unprecedented.

From 1983 to 1986, unrelated to deregulation, inflation subsided and interest rates fell. The business climate improved, and the real estate market boomed. Thrifts made extensive use of their new power to make nonresidential loans. This prosperity turned around in just a few years. By the late 1980’s, problems in the oil industry and an overbuilt real estate market led the economy downward. The FSLIC could not handle the drain on its resources caused by numerous failures of thrifts. In response, Congress enacted the Financial Institutions Rescue, Recovery, and Enforcement Act Financial Institutions Rescue, Recovery, and Enforcement Act (1989) (FIRREA) in August, 1989. In some respects, FIRREA was the counterpoint to the Garn-St. Germain Act. FIRREA put the clamps back on the thrift industry. It provided funds to support the industry, but it also imposed provisions to return the industry to its residential mortgage roots.

Several implications may be drawn from events since deregulation. First, individual institutions have made changes in their functions and in the products and services they offer. Different types of institutions are becoming more alike; there is a blurring of function among the various depository institutions. Second, greater competition has meant more competitive pricing and shrinking profit margins. Few banks and thrifts can afford to offer free or underpriced services as benefits to customers. This is likely to be a permanent feature of the industry. Third, shrinking profit margins have resulted and likely will continue to result in bank and thrift failures. This trend appears to be leading to an industry of fewer, but larger, institutions. Fourth, the increased incidence of failure has led to further government intervention. This reregulation is apparent in some of the provisions of FIRREA. Fifth, deregulation led some government analysts to the conclusion that there was regulatory overlap in the system. The FDIC absorbed the FSLIC through FIRREA. More such consolidations are probable.

One of the implications of deregulation for consumers is that they can expect to find market rates offered on financial services. Borrowers will pay market rates to obtain funds and may be asked to absorb more of the risk of changes in interest rates through variable-rate loan arrangements. Borrowers who had locked in low rates benefited tremendously in the 1970’s and early 1980’s. Depositors will seek market rates on the funds they invest in banks and thrifts. Consumers have become more sophisticated about the financial markets and will continue to show interest rate sensitivity in making deposit choices. In addition, consumers will be given more options through increased competition. Deregulation has brought about a proliferation of alternative financial services. Consumers should be able to tailor financial services to their needs.

Not all the implications of deregulation are positive. It is clear, however, that the impact of deregulation has been extensive and long-lasting. The structure of the financial markets has been changed profoundly. The roles of the banks and thrifts and the manner in which they conduct business have been revolutionized. Depository Institutions Deregulation and Monetary Control Act (1980)
Depository Institutions Act (1982)
Garn-St. Germain Depository Institutions Act (1982)[Garn Saint Germain Depository Institutions Act]
Savings and loans;deregulation

Further Reading

  • Bowden, Elbert V., and Judith L. Holbert. Revolution in Banking. 2d ed. Reston, Va.: Reston, 1984. Provides detailed analysis of changes occurring in the financial services industry during the early 1980’s and an outlook for the system from that era’s point of view. Represents an early attempt at putting deregulation of depository institutions into perspective. Includes numerous suggested readings on the topic.
  • Cargill, Thomas F., and Gillian G. Garcia. Financial Deregulation and Monetary Control. Stanford, Calif.: Hoover Institution Press, 1982. Presents the DIDMCA from a historical perspective. Written prior to completion of the deregulation process; presents an interesting foretelling of events yet to come. Emphasizes the impact of DIDMCA on the financial system, with an excellent review of the implications for governmental monetary policy.
  • Cooper, Kerry, and Donald R. Fraser. Banking Deregulation and the New Competition in Financial Services. Cambridge, Mass.: Ballinger, 1986. Extensive academic review of the literature concerning the revolution in financial services. Reviews and analyzes financial change; assesses the forces and events that forged the new structure. Describes the nature of changes as they existed and offers insights into possible future directions of the industry.
  • Goldberg, Lawrence G., and Lawrence J. White, eds. The Deregulation of the Banking and Securities Industries. Washington, D.C.: Beard Books, 2003. Compilation of academic papers presented on areas of regulation.
  • Lash, Nicholas A. Banking Laws and Regulations: An Economic Perspective. Englewood Cliffs, N.J.: Prentice Hall, 1987. A comprehensive but nontechnical review of the major laws and regulations influencing the banking/thrift systems. Completely describes the evolution and demise of Regulation Q. Clearly states the major provisions of both DIDMCA and the Garn-St. Germain Act.
  • Roussakis, Emmanuel N. Commercial Banking in an Era of Deregulation. 3d ed. New York: Praeger, 1997. Examines commercial banking in the framework of the entire U.S. financial services industry. Emphasizes the changes experienced by the industry at large, stressing the transformation of roles of various depository institutions. Examines the forces that shaped new trends in the financial markets. Places greatest emphasis on the management challenges of the new competition.

U.S. Regional Branch Banking Is Approved

Federal Regulators Authorize Adjustable-Rate Mortgages

U.S. Government Bails Out Continental Illinois Bank

Lincoln Savings and Loan Declares Bankruptcy