LONDON – As the tenth anniversary of the start of the global financial crisis approaches, a wave of retrospective reviews is bearing down on us. Many of them will try to answer the Big Question: Has the financial system been fundamentally reformed, so that we can be confident of preventing a repeat of the dismal and destructive events of 2008-2009, or has the crisis been allowed to go to waste?
There will be no consensus answer to that question. Some will argue that the post-crisis reforms, especially those concerning banks’ capital requirements, have gone too far, and that the costs in terms of output have been too high. Others will argue that far more must be done, that banks need far higher capital, and possibly, as the proponents of a recent Swiss referendum argued, that banks should lose their ability to create money.
But any reasonable observer must acknowledge that there has been a very significant change. Most large banks now have 3-4 times as much capital, and of far higher quality, than they had in 2007. Additional buffers are now required in systemic institutions. Risk management has been greatly strengthened. And regulatory intervention powers are far more robust. Political support for tough regulation remains strong, at least everywhere except the United States, and even there the Trump administration’s measures have mainly benefited community banks, not Wall Street.
There is one area, however, where far less has been achieved. As former US Federal Reserve board chair Paul Volcker has observed, “virtually every post-mortem of the financial crisis cites the convoluted regulatory system [in the US] as a contributory factor in the financial meltdown.”
Yet the 2010 Dodd-Frank legislation, which sought to address the shortcomings exposed by the financial crisis, made very few changes. It abolished only one small agency, the unlamented Office of Thrift Supervision, and added another, the Consumer Financial Protection Bureau, a body so little loved by the current administration that one wonders about its longevity.
The convolution highlighted by Volcker was not addressed. His verdict today is that “the system for regulating financial institutions in the US is highly fragmented, outdated, and ineffective.” Aside from that, all is well!