Financial Crises and Legislation

Abstract

Scholars frequently assert that financial legislation in the United States is primarily crisis driven. This “crisis-legislation hypothesis” is often cited as an explanation for various supposed shortcomings of US financial legislation, including that it is poorly conceived and inadequate to the problems it aims to address. Other scholars embrace the hypothesis, but from the perspective that crises are the needed impetus to prompt constructive reforms. Despite the prevalence of this hypothesis, however, its threshold assumption—that Congress passes major financial legislation only when financial crises arise—has never been analyzed empirically. This article provides that analysis. We first devise a new system for assessing legislative importance based on the notion of citation indexing, the principle at the heart of algorithms employed by modern search engines such as Google. Using a suite of legislative importance metrics, we show that the crisis-legislation hypothesis strongly fits for securities laws but far less so for banking laws. We conclude, therefore, that reformers would be ill-advised to push for government interventions in the banking system only following crises and that those seeking to understand dysfunction in US bank regulation will need to pursue fuller explanations.

Keywords: Financial Regulation, Banking Law, Securities Law, Financial History, Political Economy

JEL Classification: G28, K22, L5, D7, P16