Deregulation: Definition, History, Effects, and Purpose

What Is Deregulation?

Deregulation is the reduction or elimination of government oversight of an industry.

Proponents of deregulation argue that deregulation creates more competition and spurs economic growth. Opponents assert that deregulation risks grave harm to consumers, workers, and the environment.

The struggle between proponents of regulation and those of government nonintervention has shifted market conditions. Some of the sectors that have been deregulated in the United States include trucking, railroads, and airlines. The financial services industry has been regulated, deregulated, and re-regulated over the years as events warranted.

Understanding Deregulation

Deregulation involves removing government regulations and restrictions within an industry, at the federal, state, or local level.

It reduces some of the bureaucracy that makes it cumbersome for companies to do business and innovate.

Proponents of deregulation say it:

• Reduces burdensome red tape
• Creates a competitive edge
• Opens up opportunities for entry by new players
• Helps stimulate the economy
• Allows companies to free up capital to use to run their businesses

But there is plenty of criticism. Those against deregulation say it leads to ethically questionable business practices, removes accountability, and leads to a lack of transparency on how businesses operate.

Eliminating regulations can have detrimental impacts on consumers and workers when they touch on health, safety, environmental impact, consumer protection, ethical issues, and more.

For example, the Federal Trade Commission (FTC) a new "Junk Fees Rule" in late 2024 to prohibit businesses from burying extra fees in event ticket prices and hotel rates.

The History of Deregulation in the Financial Industry

The Early Days

The financial sector in the U.S. wasn’t heavily regulated until the stock market crash of 1929 and the Great Depression that followed.

President Franklin D. Roosevelt’s administration responded to the financial crisis by enacting financial regulation. This included the Securities Exchange Acts of 1933 and 1934 and the U.S. Banking Act of 1933, known as the Glass-Steagall Act.

The Securities Exchange Acts require all public companies to disclose relevant financial information and established the Securities and Exchange Commission (SEC) to oversee securities markets.

The Glass-Steagall Act prohibited a financial institution from engaging in both commercial and investment banking. This reform legislation was based on the belief that the pursuit of profit by large, national banks must have spikes in place to avoid reckless and manipulative behavior that would harm the lead financial markets.

Deregulation in the 1980s to 1990s

In 1986, the Federal Reserve reinterpreted the Glass-Steagall Act and decided that 5% of a commercial bank’s revenue could be from investment banking activity. In 1996, that level was pushed up to 25%. The following year, the Fed ruled that commercial banks could engage in underwriting. In 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act was passed, amending the Bank Holding Company Act of 1956 and the Federal Deposit Insurance Act, to allow interstate banking and branching.

In 1999, the Financial Services Modernization Act, or Gramm-Leach-Bliley Act, was passed under the watch of the Clinton administration and overturned the Glass-Steagall Act completely.

In 2000, the Commodity Futures Modernization Act prohibited the Commodity Futures Trading Commission from regulating credit default swaps and other over-the-counter (OTC) derivative contracts.

In 2004, the SEC made changes that reduced the proportion of capital that investment banks have to hold in reserves.

Re-Regulation: The Great Recession and Beyond

This spree of deregulation came to a grinding halt following the subprime mortgage crisis of 2007 and the financial crash of 2007–2008, most notably with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which restricted subprime mortgage lending and derivatives trading.

However, with the 2016 U.S. election bringing both a Republican president and Congress to power, President Donald Trump and his party set their sights on undoing Dodd-Frank.

In May 2018, Trump signed a bill that exempted small and regional banks from Dodd-Frank’s most stringent regulations and loosened rules put in place to prevent the sudden collapse of big banks. It passed both houses of Congress with bipartisan support after successful negotiations with Democrats.

Trump said that he wanted to “do a big number” on Dodd-Frank, possibly even repealing it completely. However, the bill's co-sponsor and former Rep. Barney Frank (D-Mass.) said of the new legislation, “This is not a ‘big number’ on the bill. It’s a small number.”

The legislation left major pieces of Dodd-Frank’s rules in place and failed to make any changes to the Consumer Financial Protection Bureau (CFPB), which was created by Dodd-Frank to police its rules.

Effects of Deregulation

The hoped-for effects of deregulation are to increase investment opportunities by eliminating restrictions for new businesses to enter markets. Increasing competition encourages innovation, and as companies enter markets and compete with each other, consumers enjoy lower prices.

Lessening the need to use resources and capital to comply with regulations allows corporations to invest in research and development. Without needing to comply with mandates, businesses will spend their time and money developing new products, employing more labor, exporting more goods, and buying new assets.

Example of Deregulation

The financial industry is not the only major sector to demand and win deregulation.

In 1978, Congress passed the Airline Deregulation Act, which changed the landscape of the industry. By removing certain restrictions, the law allowed new airlines to enter the market, including smaller regional competitors.

It also allowed airlines more freedom to fly to new locations, increase the number of planes in the air, and boost the number of passengers per flight.

The Bottom Line

Deregulation lowers the costs of operating a business, allows more competitors to enter a market, and lowers prices for consumers. These factors can help stimulate efficiency and lead to increased economic growth.

That's the upside. The downside is the potential for harm to consumers, workers, and the environment if businesses ar allowed to operate entirely without oversight.