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.
At a closed-door meeting in Washington on Monday, Treasury Secretary Steven Mnuchin directed five key agencies to re-examine what's permitted under the Volcker Rule, which bars banks from wagering on markets with their own capital, Bloomberg News reported Friday. This is sure to provoke a visceral response among many who have come to associate this regulation with a crackdown on excessive risk taking on Wall Street. But it makes sense to study whether it's been the most-effective tool to reduce systemic fragility.
While discussions of regulatory burdens can quickly get bogged down in minutiae, one of the main points will be needless higher costs, and many participants will point to an obvious illustration: the explosion in the number of people needed to keep track of all the new rules.
Anecdotally, anyone who works at a big bank or investment firm will happily talk about the army of staff they need to meet all the changing requirements by all the different regulatory bodies, many of which don't even share data.
To give a sense of just how substantial those costs have become, consider Bureau of Labor Statistics data showing a drastic increase in the number of compliance officers in the past few years.
This data isn't perfect, and BLS generally cautions against comparing one year's data against the other because of changes in the way it is collected. Still, the trend line is clear. And these financial compliance professionals are relatively high paid, with average salaries of about $100,000 a year or more.
It would be extremely helpful if regulators just standardized the data-reporting requirements, so firms didn't have to cull different sets of numbers, many of which overlapped, for all the different agencies, according to Barbara Novick, vice chair and co-founder of BlackRock Inc., who also attended the Atlanta Fed conference this week. She noted, "Data is not the same as information."
And that's just the tip of an incredibly important iceberg. This isn't to say that all the new rules implemented after the 2008 crisis were counterproductive and should be thrown out. In fact, perhaps additional regulations would be helpful, such as better oversight of shadow-banking operations. It's just to reiterate the point that more regulation isn't necessarily better. It's making sure existing rules target the right areas and are streamlined enough to avoid wasting public and private money while safeguarding stability.
The debate over regulations has become emotional, in part because it has been driven by the highly polarizing President Trump, who at times appears to have unclear motivations. Within the financial industry, however, there are some good arguments for why this regulatory review should be taken seriously. If done well, it could lead to a safer system with fewer extraneous costs.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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