The two-year anniversary of the passage of the Dodd-Frank Act is a good occasion to consider where we stand with respect to the proposals adopted in response to the financial crisis. Moreover, we do so in an environment of continued turmoil in the financial markets and banking industry.
It is a restatement of the obvious to observe that the 2007 to 2009 financial crisis has led to a fundamental re-ordering of the regulatory landscape for large banking institutions. Just like the Great Depression was the impetus behind the passage of landmark legislation, including the Glass-Steagall Act and the Securities Act of 1933, the perceived lessons of the recent financial crisis have provided the inexorable impetus behind the passage of the Dodd-Frank Act.
While sweeping, however, the Dodd-Frank Act is but one component of this re-ordering of the U.S. and international bank regulatory environment. Aspects of these fundamental reforms include: the international adoption of significantly enhanced capital requirements and the implementation of mandated liquidity ratios; the introduction of effective floating, minimum capital requirements under stressed scenarios in the U.S.; increased efforts towards “ring-fencing” the local operations of internationally active banks; and the imposition of new analytical frameworks that seek to discourage the buildup of systemic risks through additional capital surcharges and limits on growth through acquisitions.
The emerging regulatory landscape is certainly more stringent and less forgiving. In many ways, this is rightly so—the crisis revealed deficiencies that needed to be fixed (although in the case of the Volcker Rule, one cannot readily identify a need for it in the 2007 to 2009 experience). One may debate the relative merits of some of the specific changes being made, at least in the case of measures that are in final enough form to permit evaluation. More crucially, however, it is proving very difficult to analyze how this new regulatory landscape will operate in practice to shape the very nature of the U.S. and international banking industry as a whole. Thus, in the short term at least, a dominant characteristic of the regulatory landscape emerging in the wake of the financial crisis is:
- uncertainty arising out of specific rules that require important clarifications, or actually remain to be written; and
- uncertainty as to how exactly all the rules will work (or not) together.