After two years of effort, the US Congress last week gave President Obama a massive and very ambitious financial reform bill, the Dodd-Frank Act, to sign.
The 2,300 page law in 15 sections affects all financial service activities in various ways but it does little to improve systemic risk control. It strengthens the hands of regulators, but relies on them entirely to identify and avert future crises, things they have not been successful in doing in the past.
Too-big-to-fail financial firms (those with more than $50bn of assets, of which there are about 40 in the US) are largely left alone, free to be as large and complex as before.
However, if one of these financial firms faces a liquidity crisis in the future, which is likely given their aggressive business strategies, rescuing it with taxpayer funds to avoid a systemic crash will be much more difficult. Precluding bailouts when they are necessary will severely limit the government's ability to manage the next crisis.
Read the full opinion editorial on eFinancialNews.com