Financial Crises and Legislation

Abstract

Scholars frequently assert that financial legislation in the U.S. is primarily driven by financial crises. This ‘crisis legislation hypothesis’ is often cited as an explanation for various supposed shortcomings of US financial legislation, including that it is ill-conceived and inadequate to the problems it aims to address. Other scholars embrace the hypothesis, but from the perspective that financial 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 systematically assessing legislative importance based on the notion of citation indexing, the principal at the heart of algorithms used by modern search engines such as Google. Using a suite of legislative importance metrics, we show that the crisis legislation hypothesis fits strongly for securities laws, but far less so for banking legislation. We conclude, therefore, that reformers would be ill-advised to only push for government interventions in the banking system post-crises, and that those seeking to understand dysfunctions in U.S. bank regulation will need to seek fuller explanations.