Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980
- Gave thrift institutions wider latitude in activities
- Approved NOW and sweep accounts nationwide
- Phased out interest-rate ceilings on deposits
- Imposed uniform reserve requirements on depository institutions
- Eliminated usury ceilings on loans
- Increased deposit insurance to $100,000 per account
https://www.federalreservehistory.org/essays/monetary_control_act_of_1980
The Depository Institutions Deregulation and Monetary Control Act is said to be one of the most important laws to affect The Federal Reserve in its 100-year history. The act was signed by president Jimmy Carter and specifically targeted two particular areas; deregulation of institutions that accept deposits and efforts to improve the control of monetary policy by the Federal Reserve.
The regulatory atmosphere that banks were operating in at the time needed completely rebuilt from the ground up. Although interest rates rose to double digit levels, the rates that depository institutions were allowed to pay on their deposits were limited by laws in effect since the Great Depression. Therefore, savers began ditching banks and putting their money into unregulated entities. Some savers, primarily those of a lower income, could not access such alternatives easily which kept them stuck at rates significantly lower than what was available in the markets at the time. This in turn made saving less attractive and make a huge impact on “traditional banking.”
Title II of the act is known as the Depository Institutions Deregulation Act of 1980. According to the article, “It phased out restrictions on interest rates that depository institutions could offer on their deposits.” This phase-out lasted six years and by eliminating restrictions on rates, banks now had the ability to compete for funds, and consumers were again interested in saving since they were now able to earn a higher rate of return. Also, according to the article, “Title I of the act is known as the Monetary Control Act of 1980. It required all institutions that accepted deposits (“depository institutions”) to meet reserve requirements. Reserve requirements are an important tool the Fed can use to achieve desired changes in the money supply.” Monetary control was crucial because since saving and loans banks and credit unions were part of the money supply, but were not subject to the Fed’s reserve requirements.
As mentioned at the beginning of this summary, this act is said to be one of the most important laws to affect the Federal Reserve in its 100-year history and Paul Volcker noted that Titles I and II “will undoubtedly take their place among the most important pieces of financial legislation enacted in this century.” In the last decades, market and financial innovations have made traditional measures of the money supply less informative but regardless, it has evened the playing field across all institutions.
Depository Institutions Act of 1982 (Garn-St. Germain)
- Gave the FDIC and the Federal Savings and Loan Insurance Corporation (FSLIC) emergency powers to merge banks and thrifts across state lines
- Allowed depository institutions to offer money market deposit accounts (MMDAs)
- Granted thrifts wider latitude in commercial and consumer lending
https://www.federalreservehistory.org/essays/garn_st_germain_act
This Act was put in place by President Ronald Reagan and aimed to ease pressures on depository institutions as the Fed raised interest rates to curb the high inflation of the 1970s. During the 1970s the US economy was high rates of inflation and banks and thrift institutions were delimited from raising deposit interest rates. In October 1979, Paul Volker, Chairman of the Federal Reserve tried to contain inflation; unfortunately, his actions raised market interest rates even further. The Depository Institutions Deregulation and Monetary Control Act of 1980 laid the ground work for a lot of the legislation to better cope with this declining environment.
The Garn-St Germain Act aimed to ease the pressures on banks, and thrift institutions. The act expanded on previous deregulation legislature by implementing a new money market deposit account (MMDA) and a Super NOW account. The MMDA accounts were popular for households while the NOW accounts were business focused. As households and businesses used the MMDA and NOW accounts to shift funds from money to near money, the Fed experienced increasing difficulties in conducting monetary policy. Since the FDIC was finding it increasingly difficult to identify acquirers for the vastly growing amount of institutions that were failing, “the act provided the insurers with emergency powers to breach the 1927 McFadden Act, which had given states the authority to regulate bank branching, and other barriers to interstate banking by allowing cross-industry and cross-state acquisitions.” This act opened doors that would eventually lead to interstate banking, which originated in the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.
Title VIII of the Garn-St Germain Act allowed lenders to make alternative mortgages which put a lot of people in a hard spot during the recent financial crisis. According to the article, “Some unrestrained lenders, for example, offered infamous 2/28 adjustable-rate mortgages to entice subprime borrowers to initiate loans at low rates, only to find that they could not afford the payments when the mortgage quickly reset at a much higher rate. Millions of foreclosures ensued.”
Gramm-Leach-Bliley Financial Services Modernization Act of 1999
- Repealed Glass-Steagall and removed the separation of banking and securities industries
https://www.federalreservehistory.org/essays/gramm_leach_bliley_act
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 was signed into law by President Bill Clinton. The act repealed large parts of the Glass-Steagall Act, which had separated commercial and investment banking since 1933. This act led to the creation of financial holding companies in which Fed was granted new supervisory powers.
To back track, according to the text, “The Banking Act of 1933 (Glass-Steagall) had set up a wall of separation between certain sectors of the financial services industry. These restrictions were a response to the perception that commercial and investment banking had become too intertwined leading up to the 1929 stock market crash.” Unfortunately, the Glass-Steagall act contained language in Section 20 of the law that “the law prohibited bank affiliation with firms that were “engaged principally” in underwriting and dealing securities.” In other words bank holding companies could create subsidiaries or merge with other firms as long as the majority of the activities were legitimate.
When the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 was first brought to fruition, its purpose was to promote the benefits of financial integration for investors and consumers while safeguarding the safety and security of banks and financial systems. The primary change in the law unveiled a new type of financial institution: Financial Holding Companies (FHC). “A FHC was essentially an extension of the concept of a bank holding company—an umbrella organization that could own subsidiaries involved in different financial activities. This was something of a compromise, as security and insurance underwriting and sales by depository institutions would still be restricted, but banks could be part of a larger corporation that was involved in those activities.”
After the market collapse in 2008, many questions have surfaced regarding how effective this act really was. Many have determined that this consolidation trend began the law even when into effect; the Citicorp/Travelers Insurance merger was referenced earlier in the article. Also, if this was such a good policy, why weren’t more corporations taking the opportunity to become and FHC? A great example posed in the article was this, “To what extent did Gramm-Leach-Bliley actually ease the crisis, for example, by allowing distressed investment banks like Bear Stearns and Merrill Lynch to be acquired by FHCs rather than go bankrupt, or by allowing others like Goldman Sachs and Morgan Stanley to reorganize as FHCs and improve their market reputations?”
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
- Created Consumer Financial Protection Bureau to regulate mortgages and other financial products
- Require routine derivatives to be cleared through central clearinghouse and exchanges
- Authorized government takeovers of financial holding companies
- Created Financial Stability Oversight Council to regulate systemically important financial institutions
- Banned banks from proprietary trading and from owning large percentages of hedge funds
https://www.history.com/topics/21st-century/dodd-frank-act
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is legislation that was signed into law by President Barack Obama in 2010 in response to the financial crisis that is known today as The Great Recession. The purpose of the Dodd-Frank act was to regulate the financial industry and create programs to prevent and stop mortgage companies and lenders from taking advantage of consumers and pressuring them into mortgages that were impossible to pay off. The article states that, “Supporters say it places much-needed restrictions on Wall Street, but critics charge Dodd-Frank burdens investors with too many rules that slow economic growth.”
The initial version of this act was presented to the House of Representatives in July 2009. In December 2009, Senator Chris Dodd and U.S. Representative Barney Frank introduced new revisions to the bill which would then be named after the two men when the Act officially became a law in 2010. The article insists that Dodd-Frank is “considered the most comprehensive financial reform since the Glass-Stegall Act, which was put in place after the 1929 stock market crash.”
Some of the main provisions are as follows:
- Banks are to have a quick shut down plan in place in the event that the bank runs out of money or goes bankrupt.
- To account for future slumps, financial institutions are to increase the amount of money in their reserves.
- Banks above a 50-billion-dollar asset threshold must take Federal Reserve administered “stress tests” every year to determine the banks’ ability to survive financial crisis
- The Financial Stability Oversight Council (FSOC) identifies industry risks and monitors large institutions
- The Consumer Financial Protection Bureau (CFPB) works with bank regulators to stop risky lending and other practices that could hurt American consumers.
- The Office of Credit Ratings ensures that agencies provide reliable credit ratings to those they evaluate.
- A whistle-blowing provisions to encourage individuals to report information about violations to the government. In return for individual’s cooperation, there is a financial reward set in place.
The article mentions “The Volcker Rule.” The Volcker rule, named after Paul Volcker, “Forbids banks from making certain investments with their own accounts. For example, banks can’t invest, own or sponsor any proprietary trading operations or hedge funds for their own profit, with some exceptions.”
The Dodd-Frank Act is still alive and well today and in 2017, President Donald Trump prompted regulators to review the provisions made to the Dodd-Frank Act and create a report outlining possible reforms. In 2017 and 2018 there have been many efforts to roll back some of the provisions within the Dodd-Frank Act but nothing has been yet set in stone.