Eight years after the worst of the financial crisis, the new U.S. financial regulatory structure is largely in place. The Dodd-Frank Wall Street Reform and Consumer Protection Act and a set of standards negotiated by global regulators have produced new rules and regulations that policymakers can now observe empirically to determine how this new structure is working. It is time for policymakers to assess the cumulative impact of the regulations on the condition of the financial system, economic growth, and all end-users of financial services, including consumers, small and large businesses, and investors. In implementing the new regulatory framework, did policymakers strike the right balance among these three factors?
The Bipartisan Policy Center’s Financial Regulatory Reform Initiative’s answer, in summary, is that Americans have a safer financial regulatory system than before the crisis, but there are some less-than-optimal outcomes and unintended consequences of post-crisis reform that warrant attention.
America has a safer financial regulatory system than before the crisis, but there are some less-than-optimal outcomes and unintended consequences of post-crisis reform that warrant attention.
The financial system is safer than before the crisis. Financial institutions are better prepared to withstand future disruptions with higher capital, liquidity, and risk governance standards; and regulators are better able to manage the failure of large financial firms. Consumers, especially mortgage borrowers, are better protected from risky financial products through a series of new rules and actions by the new Consumer Financial Protection Bureau. Derivatives transactions are more transparent and safer due to margin and clearing requirements.
Key Post-Crisis Changes
- Heightened prudential standards (e.g., higher capital and liquidity, stress testing) make the financial system and financial firms safer.
- Title II recovery and resolution planning and resolution authority allows for orderly failure.
- Derivatives transactions are safer and more transparent due to clearing and margin rules.
- Creation of the Financial Stability Oversight Council and Office of Financial Research provide attention to systemic risk, even while both agencies remain works-in-progress.
Consumers, Businesses, and Investors
- A new Consumer Financial Protection Bureau has issued and clarified rules to protect consumers.
- Bank lending is up, but some borrowers, notably low- and moderate-income families, and small businesses, still face credit constraints.
- Derivatives trading is more transparent for buyers.
- The economic recovery has been slower than after previous recessions, even while U.S. growth has outperformed most other developed countries.
- Banking-system profits are up, but returns on equity generally are down, with potential consequences for banks’ ability to attract, retain, and deploy capital to promote economic growth.
- Market liquidity and market making may be hampered—and could be even more so in periods of stress.
At the same time, developing and implementing hundreds of new rules has produced some outcomes that are not ideal. This is to be expected, but such cases merit review and reform. That is the point of this paper. Rules devised by several agencies with multiple internal teams will sometimes not be coordinated well or might even conflict with each other. Other rules may be duplicative, or not optimally calibrated. Still other rules may work mostly as intended but also produce unintended consequences. Such outcomes and unintended consequences can affect access to credit and costs for consumers, and they can impede economic growth and financial innovation. In addition, there may be gaps in regulation that either have not been adequately addressed by post-crisis reforms or have emerged since the crisis that could negatively impact financial stability in addition to consumers and the economy.
BPC’s research is bolstered by more than 30 interviews of current and former regulators, consumer groups, market analysts, bankers, labor advocates, asset managers, and other experts.
Over the past few months, BPC’s Financial Regulatory Reform Initiative has examined this question, paying attention to financial conditions for the consumers and businesses who rely on the financial system. We reviewed data on the condition of the financial system, credit flows, and economic growth. We complemented our research with more than 30 interviews of current and former regulators, consumer groups, market analysts, bankers, labor advocates, asset managers, and other experts to gauge the impact of post-crisis financial regulations.