Abstract
Every major financial crisis in the United States has been followed with a regulatory response meant to keep another crisis at bay. The current crisis is no different; on 21 July 2010, a sweeping regulation was passed designed to prevent another financial crisis. If history is a reliable guide, the regulatory response is likely to contribute to the next financial crisis unless some sound understanding of the causes of the crises is determined. The purpose of this article is to empirically test the perspective that too much regulation and poor policy choices contributed to the first financial crisis of the twenty-first century. We find statistical evidence to indicate that policies at the Government Sponsored Enterprises, monetary policy and the Community Reinvestment Act all compromised large bank performance for the 1999 through 2008 period.
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REFERENCES AND NOTES
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Throughout the sample period, there were, on average, just under 105 FDIC insured commercial banks in each MSA and, on average, approximately 447 financial firms in each MSA.
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This is not surprising given that FHA was not significant in the regression above and since the FHA comprised a small portion of total loans. Re-estimating equation (1) excluding FHA resulted in no significant changes to the results reported in Table 2.
See Appendix for the regression results to equations 2(a)–2(d).
An F test on the joint significance of all three regulatory variables Granger Causing ROE was 9.30 (significant at the 1 per cent level); for ROA the F was 8.97 (significant at the 1 per cent level); and for NIM 1.61 (not significant).
Ely.8
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APPENDIX
APPENDIX
Regression results for equations 2(a), 2(b), 2(c), 2(d)
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Nichols, M., Hendrickson, J. & Griffith, K. Was the financial crisis the result of ineffective policy and too much regulation? An empirical investigation. J Bank Regul 12, 236–251 (2011). https://doi.org/10.1057/jbr.2011.3
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DOI: https://doi.org/10.1057/jbr.2011.3