Financial Regulation After the Crisis

Abstract

I critically discuss the main points in the financial reform legislation passed in the United States in 2010, with the adoption of the Dodd-Frank Act, and the planned reform proposals that are currently being drafted and discussed in the European Union. The general philosophy behind both reforms is similar. The inspiring idea is that financial innovation must be encouraged because it increases consumers' welfare and, by summing across all individuals, the whole of society's welfare. All the effort is concentrated in redesigning the regulatory and supervisory tools to deal with the whole range of new products and to be able to more accurately measure the risks arising from them than was done in the past. Once banks are ready to face those new risks, financial stability should follow. No structural measures aimed at changing the structure of financial markets or changing the business strategies of banking and nonbanking firms have been considered. The shadow banking system has not been explicitly addressed in the financial reform. Curiously enough, in the United States, regulators have succeeded in including a watered-down version of the Volcker rule in the approved reform, even though banks' share of the financial system's total activities is falling. On the contrary, in Europe, where banks are less disintermediated and have managed to reach leverage ratios higher than in the United States, no effort is planned to change their business strategy and to lower their leveragse.

Keywords:

• Europe
• financial crisis
• financial regulation
• financial structure
• United States