Our financial system is fundamentally stronger than it was four years ago, when we endured the worst financial crisis since the Great Depression. Our banks have added more than $440 billion of fresh capital, putting them on firmer footing to support lending to consumers and businesses. Our financial institutions today are also significantly less reliant on short-term financing from private investors, who fled during the crisis at the first signs of market stress.
Even as policymakers took the necessary steps to stabilize our financial system, they also recognized the precedent those actions might set. So they put in place a series of measures to help eliminate the perception that any institution is too big to fail and avoid a repeat of the Fall of 2008.
Regulators face new limitations on emergency authorities employed during the crisis. The Federal Reserve can no longer provide direct support to individual institutions, as it did with AIG. And the Federal Deposit Insurance Corporation’s authority to guarantee the financing of bank holding companies was curtailed.
Meanwhile, Wall Street Reform gave regulators new legal powers to facilitate the orderly wind down of large, failing financial firms. If the government is forced to step in, equity holders will be wiped out, management will be replaced, and the institution will be dismantled. That way, taxpayers will never again have to bear the cost of financial firms’ mistakes.
To be sure, our banking system has grown more consolidated in the aftermath of the financial crisis – a trend that has been taking hold over the last few decades. Yet, compared to its peers, the United States has the least concentrated banking system of any major advanced economy – and one of the smallest banking systems relative to the size of its economy.
Some early evidence also suggests that we are making progress addressing the perception that institutions can still be “too-big-to-fail” in the post-crisis marketplace. For example, investors are increasingly distinguishing between financial institutions, as measured by a wider variance in credit default swap spreads among the largest banks. Bank borrowing costs have also increased significantly for the largest, most complex institutions.
We still have more work to do, but all of this is welcome news for those of us who want a safer, fairer and stronger financial system.
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Mary Miller is the Under Secretary for Domestic Finance at the U.S. Department of the Treasury.