On July 21, 2010, President Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, aimed at ensuring the financial system would never again bring the U.S. to the brink of economic disaster, but five years later, the job remains far from done, according to an opinion posted today on Bloomberg. To some extent, regulators have used their powers under Dodd-Frank to require more capital. As of Dec. 31, the six largest U.S. banks had, on average, about $5 in equity for every $100 in assets (calculated according to international accounting standards). All else equal, that's enough to absorb a 5 percent loss on assets, up from less than 4 percent in June 2012. If big U.S. banks' finances are so precarious, how can they function? The answer is that creditors expect the government to step in and rescue the institutions if they get into trouble. This "too-big-to-fail" status allows the banks to borrow more cheaply than their inadequate capital cushions would otherwise allow — an implicit subsidy that benefits their executives and shareholders. Judging from recent research by economists at the New York Federal Reserve, the subsidy has so far survived Dodd-Frank's efforts to eradicate it. The law's anniversary will undoubtedly elicit calls to roll back financial regulation. In some cases, changes would make sense. In core areas such as bank capital, however, regulators still have a long way to go. If equity requirements were raised enough to eliminate implicit subsidies to the biggest banks, shareholders would have a greater incentive to break them up into more manageable — and more valuable — businesses. Perhaps then, regulation could be made simpler, too.
