The Danger of an Overgrown Regulatory Blanket

In the aftermath of the worst financial crisis since the Great Depression, lawmakers crafted a host of regulations designed to make sure such a disaster never happened again. Dodd-Frank, the Volcker Rule and other restrictions were intended to rein in what were seen as Wall Street's worst impulses.

But a diverse cross section of bankers, investors, economists and analysts surprisingly agree that the rules don't all necessarily combine to strengthen the financial system. In fact, in some cases the maze of regulations may be weakening it.

For example, Larry Summers, Harvard's president emeritus and Treasury secretary under former President Bill Clinton, presented research this week at a Federal Reserve Bank of Atlanta conference showing that all the extra capital that banks have been forced to accumulate since 2008 has failed to materially protect them from a downturn.

"I am concerned that we may not be in as strong a position as we think we are," Summers said in a Bloomberg Radio interview on Tuesday.

In large part, he said, that's because the increased piles of liquid, safe instruments that big financial firms have been forced to keep on hand have been offset by the loss in the firms' perceived franchise value, or market capitalization.

A variety of factors are responsible for this erosion in value, and it's likely that the Treasury Department review of all financial rules ordered by President Donald Trump in February will take a close look at all of them. (The Treasury Department plans to release a series of reports about its recommendations starting next month.) It's important to note that the review has broad bipartisan support from people familiar with the issues.