Since 2008, U.S. banks have raised roughly $500 billion in new shareholder capital, bringing the total to $1.7 trillion. The added capital provides a larger cushion against losses (and, of course, the new shareholders enjoy any profits).
.. In addition to more capital, banks also have a more stable base of funds used for lending. According to Geithner, deposits now represent 86 percent of U.S. banks’ liabilities, up from 72 percent in 2008. Deposits tend to be stable, because most are insured by the government (up to $250,000 by the Federal Deposit Insurance Corp.) During the crisis, the flight of uninsured short-term funds (so-called repurchase agreements and commercial paper) threatened the entire financial system.
.. Despite this, Dodd-Frank has crippled government’s ability to defuse future financial crises. It has restricted government’s “ability to act as a lender of last resort.” The Fed’s power to lend to individual institutions is curtailed, making it harder to nip future crises in the bud. The Fed can’t act until many institutions are in trouble. Consequently, we are “even less prepared to deal with a crisis” than in 2007.
.. The real Dodd-Frank scandal is that this misinterpretation of events, widely embraced by both parties, has been allowed to stand. In many bailouts, banks’ shareholders suffered huge losses or were wiped out; similarly, top managers lost their jobs. The point was not to protect them but to prevent a collapse of the financial system.
If the Trump administration doesn’t repudiate the conventional wisdom and change the law accordingly, it risks creating a future, self-inflicted wound.