Reshuffling the Banking Pack

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by Roy C. Smith

As hated as they are, bailouts, until recently, were accepted as being a necessary evil: a safety net to preserve the financial system after regulatory measures fail. But bailouts today are deeply resented, despite the fact that they usually work to stop panics, and are much cheaper than letting everything go up in smoke. Recently the Fed admitted that it alone deployed $3.3 trillion to stabilize massively disrupted credit markets after the bankruptcy of un-bailed out Lehman Bros.

Banks are now told that the era of too-big-to-fail is over. The Dodd-Frank Act has forbidden bailouts, and will subject systemically important banks to "enhanced" regulation to prevent failure. Governments generally have loaded these banks with new taxes, fees and other expenses to recover taxpayer losses. Together with higher capital requirements of Basel III and a variety of regulations yet to be written, the composite new regulatory package hopes to suppress big banks' appetites for risk.

But, having removed the safety net, what the government needs is a fail-safe financial system. So far they haven't achieved it.

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The Dodd-Frank Act, signed into law in July 2010, represented the most significant and controversial overhaul of the U.S. financial regulatory system since the Great Depression. Forty NYU Stern faculty, including editors Viral V. Acharya, Thomas F. Cooley, Matthew P. Richardson, and Ingo Walter, provide a definitive analysis of the Act, expose key flaws and propose solutions to inform the rules’ adoption by regulators, in a new book, Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance (Wiley, November 2010).

About Restoring Financial Stability

Previously, many of these faculty developed 18 independent policy papers offering market-focused solutions to the financial crisis, which were published in a book, Restoring Financial Stability: How to Repair a Failed System (Wiley, March 2009).

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