Bank Deregulation Modernizes Finance
False Assumption: Deregulating banking through laws encouraging mergers and failures would consolidate and strengthen the sector for a modern economy.
Written by FARAgent on February 09, 2026
Post-World War II America thrived with roughly 14,000 local banks and thrifts fueling community mortgages, businesses, and self-sufficiency, embodying the heroic George Bailey archetype against distant Wall Street predators. But in the early 1980s, amid neoliberal fervor and high interest rates squeezing balance sheets, policymakers deliberately unleashed deregulatory laws to provoke bank failures and mergers, chasing a vision of streamlined efficiency in a shifting financial landscape.
The fallout was swift and stark: bank counts crashed below 4,000, small banks' assets dwindled from half to 17% while they still handled 46% of new business loans, supplanted by mega-banks gorging on Fed-backed spreads like JPMorgan's $96 billion windfall. Local credit control eroded, finance morphed into bailout-fueled capital markets froth, priming crises and disillusionment that ironically birthed crypto's speculative pretender to the throne.
Critics now spotlight this consolidation's folly, with antitrust voices and scholars like Saule Omarova framing banks as vital public franchises gutted by privatization; mounting questions arise as crypto lobbies demand charters amid banking stalemates, yet elite consensus clings to big-bank dominance amid ongoing mergers.
People Involved
- In the world of banking regulation, Saule Omarova stood out. She was a scholar and a nominee for Comptroller of the Currency under President Biden.
- Omarova warned that banks operated as government franchises with public duties. She argued this view was essential to counter deregulatory excess. Critics say the banking lobby blocked her nomination.
- Mounting evidence challenges the idea that deregulation always strengthens the sector; Omarova's perspective highlights growing questions about consolidation's benefits. [1]
▶ Supporting Quotes (1)
“As the brilliant scholar Saule Omarova notes, the best way to understand banks is as franchises from the government. [...] Biden did nominate crypto foe Omarova to be the head of the Comptroller of the Currency, but local bankers lobbied the Senate to block her”— Monopoly Round-Up: The Slow Death of Banking in America
Organizations Involved
The banking lobby unified after the 1980s deregulation. It aligned with the Reagan-Bush GOP establishment. This alliance promoted further deregulation. The lobby blocked regulators who opposed consolidation or crypto encroachment. Growing questions surround whether this path truly modernized finance. The Senate Banking Committee enforced the deregulatory approach. It canceled a markup on further deregulatory legislation. This happened amid clashes between the banking lobby and crypto interests seeking banking access. Critics argue these institutional incentives sustained a flawed assumption. [1]
▶ Supporting Quotes (2)
“Over time, the banking lobby, which was fragmented into many parts, unified and became part of the Reagan-Bush GOP establishment. [...] local bankers lobbied the Senate to block her”— Monopoly Round-Up: The Slow Death of Banking in America
“On Thursday, the Senate Banking Committee abruptly canceled its meeting, known as a mark-up, to write little-noticed legislation to deregulate the financial system. And the reason is that two of the more powerful forces in D.C. - the banking lobby and the new MAGA-powered crypto world - came into conflict.”— Monopoly Round-Up: The Slow Death of Banking in America
The Foundation
Policymakers and industry leaders viewed the shift to a capital markets-driven economy as a justification for bank consolidation. Credit cards, apps, and ATMs seemed to herald a modern era. They overlooked how local banks remained superior in commercial lending to businesses. This perspective propped up the deregulatory assumption in the early days. As time passed, critics argue the evidence has shifted. Mounting evidence challenges the notion that consolidation inherently strengthens the sector for a modern economy. [1]
▶ Supporting Quotes (1)
“Of course, the world isn’t the same as it was forty five years ago. Since the 1980s, finance has changed. We are a capital markets driven economy, not a bank-driven one, and we use credit cards not checks, apps and ATMs more than branches. [...] Local banks, a la George Bailey, are more efficient with better service and more commercial lending. [...] small and regionals held just 17% of industry assets, but offered 46% of bank lending to new and growing businesses.”— Monopoly Round-Up: The Slow Death of Banking in America
How It Spread
The deregulatory assumption spread through the alignment of the banking lobby with Reagan-Bush GOP politics. Anti-government sentiment grew among bankers. High interest rates after the New Deal pressured them. This environment helped propagate the idea. Critics argue that social and political pressures sustained it, even as questions mounted. The narrative took hold in media and academia, fueled by funding incentives. Dissenters faced pushback. Growing questions now surround whether this propagation overlooked key flaws. [1]
▶ Supporting Quotes (1)
“Over time, the banking lobby, which was fragmented into many parts, unified and became part of the Reagan-Bush GOP establishment. [...] The low interest rate environment of the New Deal gave way to a high interest rate world, and that put enormous pressure on the balance sheets of bankers who had lent money more cheaply. That, plus the turn of the Democrats away from protecting small towns in favor of consumer rights, led to a sharp anti-government sentiment among local bankers.”— Monopoly Round-Up: The Slow Death of Banking in America
Resulting Policies
In the early 1980s, U.S. policymakers enacted a series of deregulatory laws. These laws encouraged bank failures and mergers. The goal was to consolidate the banking sector. Supporters believed this would strengthen it for a modern economy. Critics argue the policies may have gone too far. Mounting evidence challenges their long-term success. The laws set the stage for ongoing consolidation. Debates continue about their true impact. [1]
▶ Supporting Quotes (1)
“But in the early 1980s, policymakers sought to consolidate the sector, enacting a series of deregulatory laws to encourage bank failures and mergers.”— Monopoly Round-Up: The Slow Death of Banking in America
Harm Caused
The number of U.S. banks dropped sharply. From roughly fourteen thousand local banks and thrifts in the post-war era, fewer than four thousand remain today. Assets of small and regional banks fell from half to 17% of the industry total. Local economies lost key self-sufficiency. Control of credit shifted to distant mega-banks. For example, JPMorgan earned $96 billion in net interest margin in 2025. This came from government-guaranteed spreads, without equivalent productive lending. Critics argue these changes highlight harms from deregulation. Growing questions surround whether consolidation truly benefited the economy. [1]
▶ Supporting Quotes (2)
“In the post-war era, this mix of banking was relatively stable, with roughly fourteen thousand local banks and thrifts serving as mortgage and commercial lenders, and check clearing institutions. But [...] today we have fewer than four thousand banks [...] small and regionals held just 17% of industry assets”— Monopoly Round-Up: The Slow Death of Banking in America
“Local banks uses to be, and to some extent still are, the powerhouse of American cities and towns. [...] Americans have always understood that distant control of credit is dangerous [...] JP Morgan, for instance, made $96 billion in net interest margin in 2025.”— Monopoly Round-Up: The Slow Death of Banking in America
Sources
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[1]
Monopoly Round-Up: The Slow Death of Banking in Americareputable_journalism