Most consumers knew that 2008’s great recession came from mortgages and other risky bank lending sliding into default.  The government chose to bail out big banks rather than let them to implode, triggering the much larger calamity of a Federal Deposit Insurance collapse.  To avoid publicly identifying bad banks, government forced all large banks to take “bailout” money.  The bailout is at the core of our revulsion toward banks that are “too big to [let] fail.”

Washington has shown ongoing resentment toward banks and their smaller siblings – hedge funds, brokers, and insurance companies.  To rein in risky behaviors, the Congress crafted financial industry regulations known as the Wall Street Reform and Consumer Protection Act or “Dodd-Frank.”  Some regulations were focused on protecting consumers from lender abuses or broker misbehavior.  To provide a deeper cushion for financial shocks, one regulation increased the level of the bank’s own cash that it must hold (i.e. higher reserves).  Another regulation imposed tighter conditions on mortgage originators – now they must require mortgage insurance in most cases and must retain some of the risk the mortgage represents.  

A controversial Dodd-Frank regulation is called the “Volker Rule.”  It prohibits banks from trading stocks and bonds for their own profit.  Regulators expect that halting that risky behavior would further curtail losses that damage the bank’s finances.  Banks can still engage in trading on their customer’s behalf.

While Washington regulators have beavered on these regulations since 2010, only 40% of them are written and released.  Enforcement will be an even bigger task.  Careers for thousands of new regulators await the willing.

Banks did not wait for the Dodd-Frank rules to be written.  They concluded huge mergers such as Wells Fargo swallowing Wachovia to become $1.4 trillion in assets.  During that period, banks shed much of their non-performing mortgages, and most banks have completely repaid the “bailout” loans.  AIG, an insurer which was beleaguered by derivatives, has now repaid an $83 billion bailout loan and looks healthy.  

We hope Dodd-Frank regulations are about protecting taxpayers from bailout liability – not about financial scale per se, because banks are much bigger than when they were dubbed “too big to fail.”  

Alan Daley is a retired businessman who writes for The American Consumer Institute Center for Citizen Research