In the aftermath of the 2008 financial crisis, U.S. and international regulators undertook a massive effort to overhaul the regulation of the international financial system. In the banking realm, they established higher capital requirements so banks could better withstand economic stress; enhanced the supervision of important financial institutions; and improved the framework for resolving a failing “too-big-to-fail bank” without taxpayer support. In the U.S. these reforms came through the Dodd-Frank Act and the hundreds of federal rulemakings that have implemented it. While not complete, these reforms have made our banking system far more stable, without impairing the ability of banks to satisfy America’s need for credit and to remain profitable.
Last year the Financial Stability Board (“FSB”), an international body that monitors the global financial system and coordinates international regulatory oversight, launched a study to determine how the reforms governing the TBTF banks have impacted systemic risk and the financial system overall. The FSB has now released and seeks comment on its preliminary findings, essentially concluding that banks “are significantly more financially resilient than they were in 2007-08.” It also concluded that “[s]ignificant progress has been made in implementing resolution reforms.
In our comment letter, we commend the FSB for publishing this report. Examining and evaluating the successes and failures of financial reform is critically important if we want to make sure those reforms are strong and durable. The report provides a useful analysis of some of the most important reforms undertaken after the 2008 crash and provides useful insights into the post 2008 financial system.
That being said, the report does not devote adequate attention to a number of critical issues. For example, the FSB failed to address the threat of deregulation that is well underway, which is dismantling the safeguards put in place following the great recession and increasing the threat of another crisis. In addition, the FSB must further explore the holistic benefits of financial reform and it must address the regulatory challenges posed by the increasingly international nature of the financial markets.. The FSB should further examine these issues in their future work.
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