After the U.S. financial system came to the brink of collapse in 2008, Congress and regulators spent years on renovations designed to prevent that from ever happening again. More than six months into a global pandemic that has delivered another monumental shock, it’s worth asking: Were the reforms successful and sufficient?
The answer depends on what part of the financial system you’re looking at. Traditional banks have fared pretty well. The rest, not so much.
Regulators did a lot to make the core banking system more resilient. They increased requirements for loss-absorbing capital, and for the liquid assets needed to meet obligations in a crisis. They established stress tests designed to ensure that banks can survive a severe economic or financial shock. These changes neither throttled credit nor choked the economy, as opponents warned they would do. Rather, the costs were shared broadly — among shareholders (in the form of lower profits), bank executives (lower pay), borrowers (slightly higher interest rates) and savers (slightly lower deposit rates). Meanwhile, the U.S. experienced the longest economic expansion in its history.