Deregulation before the 2008 crisis: Glass-Steagall, leverage rules and swaps

Which rules loosened before the 2008 crisis, and when?

The EQOS Asia study lists 4 regulatory events: the repeal of Glass-Steagall in 1999, the Commodity Futures Modernization Act in 2000, the SEC’s loosening of leverage ratios in 2004, and the Fed’s low rates from 2003 (EQOS Asia 2008 back-test, 2026). The first 3 are rule changes, and the fourth is a policy choice.

Each change widened what banks could do or how much they could borrow. None of them caused the crisis alone, and together they reduced the number of checks between a risky loan and a bank’s balance sheet. The sections below take each in turn and mark where experts agree and disagree.

What did the Gramm-Leach-Bliley Act change in 1999?

President Clinton signed the Gramm-Leach-Bliley Act in November 1999. The Federal Reserve History essay says it repealed large parts of the Banking Act of 1933, known as Glass-Steagall, which had separated commercial and investment banking. It created financial holding companies that could own securities and insurance businesses beside a bank.

The law also set size limits on bank financial subsidiaries, at the lesser of $50 billion or 45% of total assets for national banks, and gave the Fed an umbrella supervisor role over the new holding companies. The structure widened what a banking group could do in one place.

Did Glass-Steagall’s repeal cause the 2008 crisis?

The Federal Reserve essay offers no definitive verdict and calls it probably too early to answer. It lists open questions: whether the law drove consolidation, given that the trend predated it; whether the purchases of Bear Stearns and Merrill Lynch by holding companies eased the crisis; and whether integration extended the safety net to affiliates.

It also notes that most major Wall Street investment banks did not reorganise as financial holding companies before the crisis. A careful reader therefore treats the 1999 repeal as one input in a longer chain, with effects that experts still weigh.

How did the 2000 swaps law leave credit default swaps unregulated?

The Commodity Futures Modernization Act of 2000 stated that credit default swaps are neither futures nor securities. Wikipedia reports that, as a result, the swaps became largely exempt from regulation by the SEC and the CFTC. The act also gave a legal safe harbour to treatment already in effect.

The study counts the act among the decisions that lowered the integrity of the system and notes that the swaps carried no reserve requirements (EQOS Asia 2008 back-test, 2026). A swap market of 62,000 billion dollars (BIS) grew inside that space, which is why the page on swaps comes next in the causes chain.

What did the SEC decide about bank capital in 2004?

The study states that the SEC loosened leverage ratios in 2004, from 15:1 to unlimited for the 5 largest banks (EQOS Asia 2008 back-test, 2026). Wikipedia describes the same decision as a net capital rule change that allowed 5 large investment banks to take on much more debt.

The point is disputed. Wikipedia quotes SEC official Erik Sirri as arguing that the Commission did not undo any leverage restrictions in 2004. Both readings agree on the outcome: by 2007 the large investment banks ran at leverage near 30:1, and the question is how much the rule change allowed it.

Why did 30:1 leverage turn a small fall into a bank failure?

Leverage multiplies both gains and losses. The study lists Lehman Brothers at 30.7:1 in 2007, with a bankruptcy threshold of −3.3%, and Bear Stearns at 33:1 with −3.0% (SEC 10-K filings). Prudential levels of 12:1 to 15:1 under Basel II give a threshold of −7% to −8%, so the large banks had a margin less than half as wide.

The actual fall in asset values across 2007 and 2008 was about 20%, roughly 6× the 3.3% threshold, according to the study. A bank with a 3% cushion cannot absorb that, whatever the quality of its management. Capital rules matter because they set the cushion in advance.

Which rules changed after the 2008 crisis?

The study links each correction to a later rule. Consolidating off-balance-sheet exposures arrived with Dodd-Frank in 2010, stricter leverage ratios with Basel III, and rating-agency reform with Dodd-Frank. It also notes that the Consumer Financial Protection Bureau was created in 2010.

The study’s own phrasing is that these measures came 4 to 6 years too late. Whatever one thinks of the details, the sequence shows that rules followed the damage. A system that waits for a crisis to tighten rules pays for the lesson with the crisis itself.

How does the EQOS Asia score treat deregulation before the 2008 crisis?

The study scores integrity at 0.08 and stability at 0.08, and lists the loosened rules among the removed safeguards. It computes an ethical safeguard value of −0.187, which blocks investment in a system with dismantled rules and structural conflicts (EQOS Asia 2008 back-test, 2026). The Λ simulator applies the same logic to your own case.

The study’s second correction restores leverage limits at 15:1 at most, aiming to lift stability from 0.08 to 0.40. With all 4 corrections it computes φ(S) = 0.365, above the 0.3 threshold. This page is general information, not investment advice.

Frequently asked questions

About the author

Stéphane Jambu

President, EQOS Forecast Asia

Stéphane Jambu leads EQOS Forecast Asia and works as a consultant in e-commerce, search visibility, and AI. LinkedIn profile