Don't Bank on Change: Finance and Regulatory Reform in the U.S.
As a number of provisions of the Dodd-Frank Act are entering into force, five years after the beginnings of the financial crisis, Professor Herman Schwartz explains how the U.S. banking community will continue to hurt the interests of the American economy and political system.
After the 1929 financial crash that caused the Great Depression, the financial system in America was kept safe through a system of formal and informal regulation: the 1933 Glass-Steagall Act kept commercial banks apart from investment banks, and all banks apart from insurance companies; federal housing corporations handled mortgage loans and channeled them towards pension plans, keeping these long-term assets apart from short-term financial instruments managed by banks, thus avoiding “maturity mismatches”.
Following years of lobbying, financial companies finally achieved global de-regulation: the 1999 Gramm-Leach-Bliley Act removed the firewall between banks and insurance companies. The 2000 CFMA Act deregulated most financial instruments, such as CDS and CDOs, and allowed banks to buy long-term assets with short-term money. Tradable assets multiplied, bringing massive profit to financial institutions based on unsound situations. When risky speculation on housing loans finally met with default, this spread to the entire financial system in a series of bank runs, giving way to the major financial crisis of 2007-2008. The federal government responded by bailing out a number of failed institutions that were “too big to fail”.
The Dodd-Frank Act of 2010 endeavors to re-regulate the system: it plans to re-segregate the different types of financial institutions under the “Volcker rule”; it includes better consumer protection, through for instance better disclosure of financial risks; and proposes many excellent regulation provisions under the authority of the Financial Stability Oversight Council.
The U.S. banking community, however, has influence not only over U.S. politicians both Republican and Democrat (through its ability to fund their campaigns), but also on the Federal Reserve system, as well as on most private businesses in the country. Dodd-Frank is therefore faced with intense lobbying for the watering-down and delaying of its provisions. Prospects for an efficient implementation are at best fragile. Additionally, the current limitation of maturity mismatches seems to be only fear-induced and will in all likelihood not last very long.
In a stern and rather pessimistic appraisal, Professor Herman Schwartz explains how the U.S. banking community will continue to hurt the interests of the American economy and political system.
Available in:
Regions and themes
ISBN / ISSN
Share
Download the full analysis
This page contains only a summary of our work. If you would like to have access to all the information from our research on the subject, you can download the full version in PDF format.
Don't Bank on Change: Finance and Regulatory Reform in the U.S.
Related centers and programs
Discover our other research centers and programs
Americas Program
Ifri's work on the Americas region focuses mainly on the United States. Indeed, for more than 20 years, Ifri's Americas Program has provided keys to understanding American society and domestic policy while shedding light on developments in the country's foreign policy, including transatlantic relations and trade issues.
Since 2023, a specific axis on Latin America structures more actively Ifri's research on this region.
Ifri's Canada program was active in 2015 and 2016.
Find out more
Discover all our analyses
RAMSES 2025. Between Powers and Powerlessness
Never before have there been so many powers able to upset the international balance of power, and never before have the dominant powers seemed so powerless to counter the fragmentation of the world.
Kamala Harris's Economic Program
Since receiving the Democratic nomination in the wake of President Joe Biden’s decision to step aside in the 2024 American presidential race, Vice-President Kamala Harris has been striving to define her own policy platform to attract voters in the limited time remaining before the November 5th election. Since the economy is a central issue for American voters, Harris developed several propositions in that area.
IRA: Towards Clean Hydrogen Leadership in the U.S.
Although late in adopting clean hydrogen (H2) and defining a national strategy–a draft was presented by the Department of Energy (DOE) in September 2022–, the United States (US) has strongly reinforced its support to clean hydrogen with the passage of the Inflation Reduction Act (IRA) in August 2022.
Convince and Coerce: U.S. Interference in Technology Exchanges Between its Allies and China
The tough-on-China policy adopted by the Trump and Biden administrations has – and will increasingly have – important consequences for Washington’s allies, both on their infrastructure choices (5G, submarine cables...) and on their technological exchanges with China.