Dodd-Frank And ‘Hyper-Charged’ Finance Where Have We Come in Five Years?
Around The Year 2000 – A ‘Hyper-Charging’ Of Finance -- Exponential growth in a variety of unsustainable trends --Financial globalization --Unregulated over-the-counter derivatives --Bank securities inventories and market exposure --Structured product markets --Enormous growth in complexity and fragility of finance.
Over The Counter Derivatives (In Billions) 800,000 8,000 700,000 7,000 Total Notional Amounts Outstanding 600,000 6,000 (left axis) 500,000 5,000 Grows five-fold in six 400,000 4,000 years, 32% annually 300,000 3,000 200,000 2,000 Total Gross Credit Exposure Grows 2.5 times 100,000 1,000 (right axis) in two years Data Source : BIS 0 0 Jun.98 Dec.98 Jun.99 Dec.99 Jun.00 Dec.00 Jun.01 Dec.01 Jun.02 Dec.02 Jun.03 Dec.03 Jun.04 Dec.04 Jun.05 Dec.05 Jun.06 Dec.06 Jun.07 Dec.07 Jun.08 Dec.08 Jun.09 Dec.09 Jun.10 Dec.10 Jun.11 Dec.11 Jun.12 Dec.12 Jun.13 Dec.13 Jun.14 Dec.14
1000 2000 3000 4000 5000 6000 0 Dec.85 Sep.86 4.5% annual growth Jun.87 Mar.88 Dec.88 Sep.89 Total Cross-Border Assets Jun.90 Mar.91 Dec.91 Sep.92 Jun.93 Foreign Assets of US Banks (In Billions) Mar.94 Dec.94 Sep.95 Jun.96 Mar.97 Dec.97 Assets In Related Offices Sep.98 Jun.99 Mar.00 Dec.00 Sep.01 Jun.02 Mar.03 Dec.03 Sep.04 Jun.05 Mar.06 Dec.06 Sep.07 Jun.08 Mar.09 Dec.09 Sep.10 Jun.11 Mar.12 Dec.12 Sep.13 Jun.14
Inventory of Bonds Not Backed by US Government Includes non-GSE MBS, CDOs, Corporate & Foreign Bonds. Millions of $ 1,600,000 Private depository institutions 1,400,000 Security brokers and dealers 1,200,000 Total private bond inventory 1,000,000 800,000 600,000 400,000 5.9% annual growth 200,000 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Americans for Financial Reform 7/2015
Bank Leverage: 2002 – 2014 (Assets/TCE ratio) Exposures materialize Hidden exposures Problem solved?
Some Observations • The hyper-charged growth has stopped, but many relatively recent change in business models has not been reversed. • Many developments leading to financial crisis still loom much larger than they did even in late 1990s (the exception is areas related to mortgage finance). • Many industry criticisms of Dodd-Frank have a ‘Back to the future’ quality, as if rules should preserve qualities of failed status quo: • US banks must be highly globalized. • Derivatives markets must be enormous. • Liquidity conditions should approximate pre-crisis period. • Inventories have fallen, but still higher than 1990s norm. • Where is the evidence this model helped real economy growth?
The Regulatory Challenge In the absence of a deeper change in business models, must keep pace with complex and fragile system • Stress testing is crucial, but under attack and hard to maintain. • Massive IT and implementation challenge. • Constant lobbying pressure on fine details of system. • If the commitment to a heavily globalized system remains, then the desire to coordinate regulation across all major jurisdictions can become an impediment to progress.
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