US Financial Regulations Circa 2010: The Coup De Grace of Dodd and Frank's Legislative Careers?

Abstract

US government authorities permitted extensive financial sector de-regulation in the two decades prior to the 2007–2008 financial crisis. The last step in this de-regulatory trend was the switch to risk-weighted captial adequacy from fixed leverage ratios for US investment banks in 2004. Combined with a highly decentralised government regulatory structure that is lauded for the regulatory competition it allows, this de-regulation created considerable scope for regulatory arbitrage. Political compromise de-railed several important reform initiatives in the wake of the crisis. The reform failed to consolidate US regulatory institutions in any material way, backed away from original intentions to mitigate the ‘too big to fail’ problem and limit banks’ investment activities, and left the clean up of the mortgage giants, Fannie Mae and Freddie Mac, for further study. The greatest change came in the reform of consumer protection, derivatives trading and macro-prudential oversight.