The Unintended Consequences of Deregulation: Insights from the Savings and Loan Industry

35 Pages Posted: 9 Nov 2023

See all articles by Michael Varley

Michael Varley

University of Chicago Booth School of Business

Date Written: October 13, 2023


Regulating the balance sheets of financial intermediaries can lead to misallocation of capital that in the long run leads to suboptimal credit provision. However, large scale changes to regulatory frameworks can lead to massive disruptions in credit provision in the short run that can unravel an industry that deregulation was meant to help. To see how disruptive these short-run forces can be, I exploit the differential exposure the 1970s U.S. savings and loan (S&L) lenders had to the partial repeal of the government-imposed interest rate ceilings on their deposit accounts and find that even small increases in lender's cost of funding leads to relatively large drops in mortgage origination--a 2SLS estimate gives a policy induced increase in deposit rates of 1 percentage point (14% increase from pre-period baseline) leads to a 40-50 percent drop in mortgage lending, or about a 3 percent drop in mortgage lending for each 1 percent increase in deposit rates. To help interpret the results, I build a simple banking model similar to Tobin (1982) and Kashyap and Stein (1995) to see how deregulation can lead to large quantity responses in a lender's optimization problem, especially in an environment where the marginal cost of funding is increasing dramatically and the marginal revenue of loans adjusts relatively slowly. Despite a simple model, it provides a rich set of predictions that are borne out in the data. My research suggests that the timing of a policy can be an important determinant to its effectiveness.

Keywords: Banking, disintermediation, mortgage, regulation Q, deregulation

JEL Classification: G01, G21, G28

Suggested Citation

Varley, Michael, The Unintended Consequences of Deregulation: Insights from the Savings and Loan Industry (October 13, 2023). Available at SSRN: or

Michael Varley (Contact Author)

University of Chicago Booth School of Business

United States

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