Published Opeds on Financial Reform: January 2011 Archives

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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by Viral V. Acharya 

Slightly over two years since the collapse of Lehman Brothers, the financial sector reforms in developed economies are still evolving. One definitive piece of legislation has been the Dodd-Frank Act, passed earlier this year by the US Congress, to restore US financial stability. How effective would the Act's provisions have been, starting in 2003-2004 (years during which the housing credit boom took hold) and until the fall of 2008 (when the financial system had to be rescued)? Would the Act have prevented the enormous build-up of leverage on financial balance sheets all betting against a material correction in the US housing market?

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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).

About the Authors