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Deregulator of Banks Set to Testify Before House

When the House Financial Services Committee examines the sweeping overhaul of financial regulation on its fifth anniversary, legislators will first hear on Tuesday from a former senator with longstanding familiarity with banking regulations.

That would be Phil Gramm, one of the chief architects of a comprehensive deregulation of the financial rules in the late 1990s. That led to the creation of mega-banks and looser oversight of financial derivatives, which some critics say laid the groundwork for the financial crisis.

Mr. Gramm, an economist by training who served in the Senate from 1985 until 2002, has long opposed what he has viewed as overly broad government regulations.

“Unless the waters are crimson with the blood of investors, I don’t want you embarking on any regulatory flights of fancy,” he once told Arthur Levitt Jr., a former chairman of the Securities and Exchange Commission.

That note is expected to be sounded again in Mr. Gramm’s testimony, according to a prepared version of his introductory remarks. He has publicly and repeatedly criticized the regulatory overhaul known as Dodd-Frank, enacted in 2010, most recently in an op-ed article in The Wall Street Journal.

“Much of our slow growth is not just a product of mounting regulatory burden but of legislative and executive actions that have empowered regulators to set rules rather than implement rules set by Congress,” Mr. Gramm says in his prepared remarks. “Dodd-Frank has undermined a vital condition required to put money and America back to work — legal and regulatory certainty.”

Among his criticisms are that Dodd-Frank has imposed new rules so tough that community banks have become swamped and are hard-pressed to compete with newer financial services technology. He is also expected to argue that the new environment introduced by Dodd-Frank has made the government much less accountable, while imposing confusing new rules on banks that are hard to follow.

Such views are part and parcel of Mr. Gramm’s regulatory efforts in the Senate, where he served on the banking committee. Perhaps his signature accomplishment was the 1999 Gramm-Leach-Bliley Act, which dismantled the Glass-Steagall Act that had prohibited the creation of financial institutions that combined commercial and investment banking like Citigroup.

Mr. Gramm also helped push for the Commodity Futures Modernization Act of 2000, which effectively limited regulations of the complex financial instruments known as derivatives, including the swaps that later underpinned the boom and bust of the housing market.

After retiring from the Senate, Mr. Gramm joined the Swiss banking giant UBS as a lobbyist.

“If we were trying to look around for people who contributed mightily to the financial crisis, Senator Phil Gramm would be on that list,” said James D. Cox, the Brainerd Currie Professor of Law at Duke University Law School.

Still, several of Mr. Gramm’s deregulatory moves were backed at the time by officials in the Clinton administration, including Mr. Levitt and Lawrence H. Summers, then the secretary of the Treasury.

Some of the other proponents of that deregulation have since publicly regretted their actions, saying that the banks born from Gramm-Leach-Bliley had become too big to properly manage.

“What we should probably do is go and split up investment banking from banking,” Sanford I. Weill, the former chief of Citi who once expressed strong support for Gramm-Leach-Bliley, said in a CNBC interview in 2012.

And Richard D. Parsons, a subsequent chairman of Citigroup, said that same year, “To some extent what we saw in the 2007-2008 crash was the result of the throwing off of Glass-Steagall.”

Mr. Gramm has defended his record. “I don’t see any evidence that allowing them to affiliate through holding companies had anything to do with the financial crisis, nor has anybody ever presented any evidence to suggest that it did,” he told Bloomberg News three years ago.

This week’s return to Capitol Hill by Mr. Gramm is a reunion of mentor and student. The Republican chairman of the House Financial Services Committee, Jeb Hensarling, studied under Mr. Gramm at Texas A&M University and later served on his staff.

A spokesman for the House Financial Services Committee pointed to Mr. Gramm’s experience as an economics professor, senator, executive at UBS and his current role as a scholar at the American Enterprise Institute as cause for his selection.

“Chairman Hensarling is thrilled to have Senator Gramm testify and share his over 40 years of experience with the committee,” the spokesman, David Popp, said in a statement. “He brings greater expertise to the examination of banking legislation than almost anyone in the country.”

In the House committee’s examination of Dodd-Frank last year, the Democratic members picked their own expert with his fair share of detractors from across the aisle: Barney Frank, the co-author of the overhaul that bears his name.

Ben Protess contributed reporting.

A version of this article appears in print on  , Section B, Page 1 of the New York edition with the headline: Deregulator of Banks Set to Testify Before House. Order Reprints | Today’s Paper | Subscribe

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