Lesson Unlearned?: Regulatory Reform and Financial Stability in the Trump Administration
Columbia Law Review Online, Forthcoming
17 Pages Posted: 17 Apr 2017 Last revised: 28 May 2017
Date Written: April 14, 2017
A central lesson of the financial crisis of 2007–2008 was that firms behaving like banks should be regulated like banks. Nonbanks that perform the same economic function as banks — so-called “shadow banks” — create the same risks and demand the same regulatory response as depository institutions with bank charters. The principal legislative reform passed in the wake of the crisis, the Dodd-Frank Act, made several important, albeit incomplete, advances in applying elements of the banking regulatory regime to shadow banks. These achievements are now at risk, as President Trump has promised to “do a big number on Dodd-Frank.” While executive and agency action can roll back some of Dodd-Frank’s reforms, durable structural reversals will require legislation. The precise contours of such legislation are hard to predict, but most commentators believe the best starting point for considering what it might look like is the Financial CHOICE Act (“CHOICE Act”) sponsored by Representative Jeb Hensarling, chairman of the House Committee on Financial Services. This Piece argues that several key provisions from the CHOICE Act evince a fundamental conceptual mistake that threatens to undermine the financial stability of the United States. The mistake boils down to a failure to grasp the functional equivalence of banks and shadow banks. This leads to a failure to appreciate the negative externalities that shadow banks can create — externalities that are devastating when they materialize and are impervious to market solutions.
Keywords: CHOICE Act, Dodd-Frank, Financial Crisis, Financial Stability, Financial Regulation, Banking law
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