Delays, Dilutions, and Delusions: Implementing the Dodd-Frank Act

Chapter in “Restoring Shared Prosperity: A Policy Agenda from Leading Keynesian Economists” (Forthcoming)

8 Pages Posted: 25 Dec 2013  

Jennifer Taub

Vermont Law School

Date Written: November 1, 2013


Five years ago, the Lehman Brothers bankruptcy filing triggered a run on the shadow banking system, leading to cascading collapses here and abroad (D'Arista & Epstein, 2010). Credit markets froze, the stock market plummeted, residential real estate prices fell, and unemployment climbed to double digits. More than four million homes were lost to foreclosure (Blomquist, 2012). What started as a banking crisis stemming from the use of excess short-term leverage to finance high-risk mortgage-linked securities (Taub, 2011), became an economic crisis and the largest downturn since the Great Depression (FCIC, 2011).

Members of the Bush administration (Paulson, 2008) made the promise of "never again" to justify the extraordinary government interventions to bail out and shore up the very institutions whose risky practices caused the collapse. The promise that the government would prevent future crashes was what helped Bush convince Congress to support the $700 billion Troubled Asset Relief Program, one small piece of the multi-trillion dollar bailout (Herszenhorn, 2008). Members of the Obama administration echoed this promise of never again, assuring the public that if their vision of reform legislation passed, the government would never again bail out the banks (McCarthy, 2010).

Yet, today, the top banks are bigger and still borrow excessively in the short-term and overnight markets leaving them vulnerable to large scale, sudden runs. Whereas at the end of 2006, the top six bank holding companies had assets equivalent to 55 percent of GDP (Johnson, 2011), at the end of the second quarter of 2013 their assets were equivalent to 58 percent (National Information Center, 2013 and BEA, 2013). While banks have increased their equity capital slightly, and there are calls by regulators and reformers for even higher requirements, their legal obligation is merely three percent of total non-risk-weighted assets. That allows borrowing of $97 for every $100 in assets, or a 33-1 leverage ratio. Such levels of leverage were a key factor in the 2007-2008 crisis (Admati, DeMarzo, Hellwig & Pfleiderer, 2011), yet both permitted and actual leverage still remains far too high (Admati 2013). Experts like former FDIC Chair Sheila Bair call for a minimum of eight percent (Bair, 2012), and others, such as finance scholars Anat Admati and Martin Hellwig suggest between twenty to thirty percent (Admati & Hellwig, 2013) to help ensure banks internalize, not socialize their losses. In addition to size and leverage, banks are still dangerously interconnected and prone to wholesale runs due to their excessive dependence on short-term, often overnight borrowing through the repurchase agreement (repo) market. Today, repos remain a fragile source of funding (Lew, 2013), with roughly $1.8 trillion in collateral financed through just the tri-party repo segment of the repo market in July 2013 (New York Fed, 2013).

Suggested Citation

Taub, Jennifer, Delays, Dilutions, and Delusions: Implementing the Dodd-Frank Act (November 1, 2013). Chapter in “Restoring Shared Prosperity: A Policy Agenda from Leading Keynesian Economists” (Forthcoming). Available at SSRN:

Jennifer Taub (Contact Author)

Vermont Law School ( email )

164 Chelsea Street
South Royalton, VT 05068

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