The Tailors of Wall Street

Abstract

The narrative that emerged in the aftermath of the COVID-19 financial crisis has focused on nonbank financial inter-mediation as the primary vulnerability that plagued financial markets starting in March of 2020 and the exogenous nature of a public health crisis as a unique precipitating event. As a result, the crisis has largely been viewed as vindication for financial regulation as it applies to banks, with the Federal Reserve playing the role of heroic rescuer of the financial system.

This Article offers an alternative—and critical—analysis of the performance of banks during the COVID-19 financial crisis and the Fed’s role as a financial regulator. Charting the course from the landmark reforms of the Dodd-Frank Wall Street Reform and Consumer Protection Act to the COVID-19 crisis reveals disconnects between the legal and policy objectives of financial regulation and the actions taken by policymakers. Rather than completing the implementation of Dodd-Frank and addressing known sources of financial fragility, the Fed pivoted to a focus on “tailoring” regulations for the largest bank holding companies. Tailoring resulted in a banking system that was unable to respond effectively to the financial market disruptions imposed by the COVID-19 pandemic, necessitating unprecedented fiscal and monetary support.

A thorough analysis of the financial policy choices in the lead-up to, and policy responses during, the COVID-19 pandemic yields important insights into the ideological underpinnings and substantive impacts of the Fed’s role as a financial regulator. The Fed’s emphasis on tailored regulation and its financial support for a range of markets during times of stress should be seen as two sides of a financial regulatory policy that has prioritized efficiency above resiliency and situated private interests above the public interest. Above all, this analysis reveals that, rather than being value-neutral, the project of tailoring, as practiced during this period, is fundamentally deregulatory. A better alternative to tailoring is a “precautionary approach” to financial regulation, ensuring that large bank holding companies are able to withstand a wide range of existing and emerging financial risks.