Editor’s note: This column is based on CEPR Discussion Paper No. 21419   “Has the Regulatory Cycle Weakened? Evidence from a Century of Financial Legislation“. 

The Global Financial Crisis of 2008 was widely expected to produce new and more effective forms of financial regulation. The collapse of Lehman Brothers, the rescue of major financial institutions, and the deepest recession since the 1930s appeared to recreate the political conditions that had previously produced far-reaching banking reforms. Instead, the reforms implemented after 2008 proved relatively modest. Basel III strengthened capital requirements and supervisory standards, but many more ambitious proposals – including a far-reaching structural separation of commercial and investment banking – were diluted or abandoned. While more supervision and extensive reporting rules increased regulatory complexity and compliance costs for financial institutions, effective regulation remained limited, particularly in areas beyond internationally agreed minimum standards. More than 15 years after the crisis, banking systems remain substantially more liberal than those that emerged after the Great Depression.

Our new research suggests that this was not simply an isolated failure of political leadership (Albers et al. 2026). Rather, it reflects a broader historical transformation of financial markets and their institutional environment. While financial crises continue to generate demands for tighter regulation, governments today operate under much stronger international constraints than their predecessors. As a result, the traditional regulatory cycle has weakened.

A century of banking regulation

The conventional view of banking regulation follows a familiar pattern. Periods of deregulation encourage greater risk-taking, fuel credit booms and ultimately contribute to financial crises. After crises, governments tighten regulation, but these rules are gradually relaxed over time until the next crisis occurs (Abiad and Mody 2005, Dagher 2018).

This regulatory cycle has become a central narrative in discussions of financial stability. Yet surprisingly little evidence exists on whether it actually describes long-run historical experience across countries. Most studies focus either on individual countries or on the post-1970 period, making it difficult to distinguish general historical patterns from country-specific developments. To address this question, we constructed a new Historical Banking Regulation Index covering 14 advanced and emerging economies between 1920 and 2020. The index combines ten dimensions of banking regulation, including structural measures – such as restrictions on bank branching, universal banking and foreign capital – with prudential measures such as supervisory institutions, capital requirements and credit controls. This longer historical perspective makes it possible to compare two defining episodes in the history of financial regulation: the response to the Great Depression and the response to the Global Financial Crisis.

Figure 1 summarises the evolution of banking regulation over the past century. The left-hand panel shows structural regulation. Following the banking crises of the early 1930s, governments fundamentally reshaped the organisation of banking systems. Many countries introduced restrictions on bank entry, branching, foreign capital movements, and the separation of commercial and investment banking. These reforms differed substantially across countries, producing a remarkable diversity of regulatory systems that persisted throughout much of the post-war period.

Figure 1 The weakening of the regulatory cycle, 1920–2020

The middle panel reports prudential regulation. Here, too, regulation strengthened markedly after the Great Depression as governments created specialised supervisory authorities, introduced liquidity and capital requirements, regulated lending practices, and, in many countries, imposed interest-rate controls. Although prudential regulation evolved over time, it remained substantially stronger than before the crisis.

The right-hand panel combines both dimensions into our aggregate index. It illustrates the classic regulatory cycle throughout much of the 20th century: regulation increased sharply after the Great Depression, gradually weakened during the era of financial liberalisation beginning in the 1970s, and then stabilised after 2008, without anything resembling the earlier regulatory backlash.

At the same time, we observe a strong convergence across countries. While during the interwar and Bretton Woods periods, countries pursued markedly different regulatory strategies, banking regulation has become much more homogeneous. Countries still differ in institutional details, but fundamentally different regulatory models have largely disappeared.

Deregulation and financial stability

The weakening of the regulatory cycle does not mean that deregulation has become less consequential. On the contrary, our analysis confirms the first element of the traditional regulatory cycle. Using the new Historical Banking Regulation Index alongside long-run macro-financial data, we find that periods of deregulation are consistently associated with stronger credit growth and greater bank risk-taking, consistent with a growing macrofinancial literature (Schularick and Taylor 2012, Jordà et al. 2021, Sufi and Taylor 2022). A one standard deviation deregulation shock is associated with a roughly 7 percentage point increase in the credit-to-GDP ratio over four years and a roughly 10 percentage point increase in banks’ loan-to-deposit ratios. Both effects are economically large and imply a substantially higher probability of future financial crises.

Figure 2 shows that both structural and prudential deregulation are associated with higher leverage and faster credit growth. The first link in the regulatory cycle therefore remains intact: deregulation continues to encourage greater financial risk-taking. The real question is why the second link has weakened. If deregulation continues to fuel financial fragility, why do crises no longer trigger sweeping regulatory reforms?

Figure 2 Association of liquidity risk and credit growth with deregulation shocks

a) Loan-to-deposit ratio

b) Loan-GDP ratio

Regulatory cycles and the financial trilemma 

Our evidence points to an answer suggested by the financial trilemma (Rodrik 2000, Schoenmaker 2013, Obstfeld and Taylor 2017). The trilemma holds that governments cannot simultaneously maintain three objectives: open international capital markets, nationally independent financial regulation, and complete financial stability. In the decades following the Great Depression, this constraint was relatively weak. International capital mobility remained limited under the Bretton Woods system, giving governments considerable freedom to design national banking systems in line with domestic political preferences. Countries responded differently to banking crises because they could.

The world changed after the liberalisation of international capital markets, beginning in the 1970s. As financial institutions increasingly operated across borders, policymakers became concerned that stricter domestic regulation would place their banking sectors at a competitive disadvantage. Historical debates over financial deregulation in France, Japan, Italy, the UK, and the US repeatedly invoked precisely this concern. The aftermath of the Global Financial Crisis illustrates the point. Governments considered much more ambitious structural reforms than those ultimately adopted. Yet, many proposals were watered down during the legislative process because policymakers feared that stricter national rules would simply encourage financial activity to relocate abroad. This concern was reinforced by decades of experience with regulatory competition and cross-border financial integration.

Our historical evidence is consistent with this interpretation. As financial liberalisation accelerated, countries became progressively more similar in their regulatory approaches. At the same time, convergence was driven primarily by the disappearance of regulatory instruments that were not coordinated internationally. International agreements such as the Basel framework established common minimum prudential standards, but they did not preserve the broader variety of national regulatory models that had characterised much of the 20th century. The result has been a gradual decline in national regulatory autonomy, accompanied by a growing reliance on international coordination.

Conclusions

These findings have important implications for current policy debates and underline why international standards such as the Basel framework have become increasingly important. Although frequently criticised for their complexity and gradual implementation, they provide a common regulatory floor that limits competitive deregulation. At the same time, our historical evidence suggests that international coordination has proved much more effective in establishing minimum prudential standards than in preserving the broader range of structural regulatory instruments that once characterised national banking systems.

The broader lesson is that the regulatory cycle has not disappeared – but it has fundamentally changed. Deregulation continues to encourage credit booms and greater financial risk, just as it did throughout the 20th century. What has weakened is the second stage of the cycle: the capacity of individual governments to respond with sweeping regulatory reforms after crises.

References

Abiad, A and A Mody (2005), “Financial reform: What shakes it? What shapes it?”, American Economic Review 95(1): 66–88.

Albers, T, A Nützenadel and T Scheib (2026), “Has the Regulatory Cycle Weakened? Evidence from a Century of Financial Legislation”, CEPR Discussion Paper No. 21419. 

Dagher, J (2018), “Regulatory Cycles: Revisiting the Political Economy of Financial Crises”, IMF Working Paper 18/8.

Jordà, Ò, B Richter, M Schularick and A M Taylor (2021), “Bank capital redux: Solvency, liquidity, and crises”, Review of Economic Studies 88(1): 260–286.

Obstfeld, M and A M Taylor (2017), “International monetary relations: Taking finance seriously”, Journal of Economic Perspectives 31(3): 3–28.

Rodrik, D (2000), “How far will international economic integration go?”, Journal of Economic Perspectives 14(1): 177–186.

Schularick, M and A M Taylor (2012), “Credit booms gone bust: Monetary policy, leverage cycles and financial crises, 1870–2008”, American Economic Review 102(2): 1029–1061.

Schoenmaker, D (2013), Governance of International Banking: The Financial Trilemma, Oxford University Press.

Sufi, A and A M Taylor (2022), “Financial crises: A survey”, in G Gopinath, E Helpman and K Rogoff (eds), Handbook of International Economics, Vol. 6.