Deregulation of financial institutions: Financial Crisis of 2008

Deregulation of financial institutions

Deregulation of financial institutions: After World War II

Financial deregulation was heavily criticized as contributing to the financial crisis of 2008, which centered on subprime mortgage lending. In 2000, Congress passed a bill prohibiting federal and most state regulation of loan-guarantee contracts (credit default swaps) and similar derivatives. Such contracts were central to the crisis. Some potentially beneficial existing regulations were not effectively enforced, notably the requirements for minimum capital of financial firms. All regulation is subject to political pressure, and all the pressure was toward expanding credit for subprime borrowers. Some regulations were criticized as aggravating the crisis, notably the accounting regulationknownas marking to market. This required that asset values be recalculated frequently based on estimates of their current market price. Valuations of assets with no real markets were arbitrary and may have contributed to the perception that firms were insolvent. New regulations are likely to emerge in response to the crisis.