Banking From Financial Crisis to Dodd-Frank: Five Years On, How Much Has Changed?

This month marks the fifth year anniversary of the passage of The Dodd-Frank Wall Street Reform and Consumer Protection Act, (Dodd-Frank) the main legislative response to the dangerous financial practices that led to the “great financial crisis” (GFC) of 2007-2008. The Dodd-Frank Act, signed into law on July 21, 2010, attempted to reign in risky practices, increase the capital and liquidity buffers banks had to hold, bring derivatives under regulation, monitor dangerous interconnections among financial institutions, and begin to bring the largest, most complex financial institutions under scrutiny and some regulatory oversight. In this report, we survey the trends of the US banking and financial system prior to and since the financial crisis and the passage of Dodd-Frank. We show that since the passage of Dodd-Frank, the financial system has become safer and more resilient in several important ways. Higher capital and stricter leverage requirements have improved the loss absorbing capacity of the banking system and reduced explicit leverage levels and have improved the resiliency of the banking system. But many destructive trends in the overall financial system have not changed. The basic business models and practices of the largest banks have not been fundamentally altered. And there are new, worrying trends in financial markets and practices such as the expansion of the “shadow banking system” and its deepening interconnections with asset management and continued interconnections with the banks themselves which are raising new stability dangers.  In the meantime, many of the basic financial needs of households and businesses are not being adequately met by our financial system. The upshot is that despite trillions of dollars of support by the Federal Reserve, Treasury Department and U.S. taxpayers, the US banking and financial system continues to reward itself handsomely for its activities, while contributing relatively little to the over-all health of the economy, all the while developing new institutions and techniques that make profits while fostering new risks for society.