Dodd-Frank Act

By Michael Pomerleano

The message of this article is straightforward. In response to the crisis, the reforms in financial regulation address threats to the banking system by increasing capital and providing for liquidity in the banking system. This article argues that the measures miss the point of the recent crisis. The liquidity crisis in the shadow banking system was a major source of financial and economic instability.

Liquidity grew within in the shadow banking system, and once liquidity evaporated, fire sales lead to downward revaluations of collateral assets. In a financial system increasingly dominated by market instruments, a collapse due to rapid revaluations or counterparty risk is a very high prospective risk. The liquidity and leverage ratios proposed by the Basel committee do not address the problem. Read more

The US is in the process of implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act. In the UK, the Vickers Commission has released interim recommendations to “ring-fence” the retail operations of banks from their investment banking activities Read more