Two decades ago, Congress repealed the Glass-Steagall Act’s Depression-era separation between commercial banking and other financial activities, paving the way for bank holding companies (BHCs) to expand into investment banking and insurance. At the time, some critics – most notably, Professor Arthur Wilmarth – warned that financial conglomeration would encourage BHCs to exploit their depository institutions’ “federal safety net.”
Critics were correct to suspect that financial conglomerates might take advantage of their bank subsidiaries by transferring government subsidies to their nonbank affiliates. Banks enjoy many forms of government support. For example, the Federal Deposit Insurance Corporation guarantees bank deposits, providing … Read more
Barclays, Credit Suisse, Deutsche Bank, UBS, and other foreign banks played an outsized role in the 2008 financial crisis that cost U.S. households trillions of dollars of wealth. As credit markets froze, foreign banks’ U.S. offices experienced extreme stress and relied on the Federal Reserve’s emergency lending facilities for survival. After the crisis, policymakers tried to strengthen regulation of foreign banks’ U.S. operations, which account for roughly 20 percent of the U.S. banking system. In my new article, Domesticating Foreign Finance, I contend that the United States’ post-crisis reforms were insufficient and that foreign banks continue to pose unwarranted … Read more
If there was one thing most people could agree on after the 2008 financial crisis, it was that “too-big-to-fail” banks were to blame for the market crash. This shared understanding was accompanied by a corollary: Small banks were not the problem. These so-called community banks were perceived to be innocent bystanders, overrun by market turmoil caused by much larger financial institutions.
Community banks have long been sympathetic figures in financial regulatory circles. Generally speaking, the term refers to banks with less than $10 billion in assets that focus on traditional financial products. Reasoning that such firms pose little risk, policymakers … Read more
On October 18, federal regulators released the largest U.S. insurance group, Prudential Financial, Inc., from enhanced government oversight. Prudential had been the last remaining systemically important financial institution (SIFI)—a designation Congress created in the Dodd-Frank Act for nonbank financial companies that could threaten U.S. financial stability. Prudential’s deregulation fulfills a years-long effort by Dodd-Frank critics to weaken a crucial post-crisis regulatory reform.
In my new essay, “The Last SIFI: The Unwise and Illegal Deregulation of Prudential Financial, Inc.,” I contend that overturning Prudential’s “systemically important” status was not only misguided, it was also against the law. By illegally … Read more