It’s been five years since the financial crisis, and depending on who you listen to, the US has either come a long way since or made pitifully little progress in reforming the system.
Barack Obama, for example, told a crowd in Galesburg, Illinois, last week that in the past half-decade, “Together, we put in place tough new rules on the big banks, and protections to crack down on the worst practices of mortgage lenders and credit card companies.”
For a different view, see our recent mini-documentary in which Booth faculty John Cochrane, Anil Kashyap, Douglas Diamond, Randall Kroszner, and Luigi Zingales outline how little has changed, and how the fundamental problems—of the fragility of our run-prone banking system—remain in place.
The documentary, which is a companion to the cover story from the Summer 2013 edition of Capital Ideas magazine, outlines four basic ideas for fixing the system:
• Break up the big banks;
• Hike capital requirements;
• Improve regulation; and
• Establish a global resolution authority.
Remarkably, in the two months since the relaunched magazine was published, there has been a frenzy of activity on these very fronts.
Big banks would be broken up, under a proposal introduced this month by four US Senators—Elizabeth Warren of Massachusetts, John McCain of Arizona, Maria Cantwell of Washington, and Angus King from Maine. Their “21st Century Glass-Steagall Act” would separate commercial and investment banking. "Big Wall Street institutions should be free to engage in transactions with significant risk, but not with federally insured deposits,” noted McCain, a longtime supporter of the idea.
Capital requirements look set to rise significantly, after the Federal Reserve said it would go beyond the ratios set in the Basel III accords, making banks not only comply with rules on equity to assets weighted for risk, but also to adopt additional leverage requirements relating equity to overall assets, regardless of risk.
There are also signs that regulators are starting to co-operate on the details of overseeing the global banks. After months of difficult negotiations, the Commodity Futures Trading Commission (CFTC), the US’s derivatives watchdog, and the European Commission struck a deal this month to work together on regulating financial transactions that could present systemic risks. To its credit, the CFTC dropped its insistence that it have jurisdiction over all US-based banks or ban them from conducting business abroad. They will now be able to do so as long as European regulations are “essentially identical” with those in the US.
We would never suggest, of course that Capital Ideas alone prompted these initiatives. But you have to admit, our timing was pretty good. Just another reason to keep following us.