Banking rules and regulations are rewritten every few decades, frequently following a crisis. The Great Depression gave rise to the Glass-Steagall Act, which separated investment and commercial banking activities. The Savings and Loan debacle led to significant industry reform, including a “Prompt Corrective Action” rule to close weak banks before their capital is completely depleted. And Black Monday resulted in trading curbs (so-called “circuit breakers”) to prevent panic-selling.
Yes, waves of post-crisis regulation are typical and often necessary. But in the aftermath of the most recent global financial crisis, Congress’s regulatory reaction was far bigger than a wave; it was more like a tsunami.
The 2,300-plus page Dodd-Frank Wall Street Reform and Consumer Protection Act made sweeping changes to the financial landscape. It created a consumer protection agency, installed new capital requirements for banks, and reined in poor mortgage practices and risks in over-the-counter derivatives trading. Some of these changes have improved conditions; others have had unintended consequences; and some have made things worse.
More than a decade after the start of the global financial meltdown and – to continue the tidal metaphor – now that the water levels have receded, it’s time to reevaluate Dodd-Frank to determine where it’s been effective and where it hasn’t.
Take, for instance, the Volcker Rule. This regulation, named for the former Federal Reserve Chairman…