Hey, Maybe Bank Regulation Is Working After All


Ben White wrote a piece in Politico yesterday suggesting that bank regulation has been more successful than most of us give it credit for. Goldman Sachs, he said, is a “shell of its former self,” and other big Wall Street banks have been hemmed in by Dodd-Frank and other new trading rules too.

I was skeptical. Still, as I’ve said in the past, the real test is bank profitability. If it goes down, it means the new regulations are doing their job. And it’s going down:

Wall Street’s earnings season has dashed hopes the sector would bounce back from its post-crisis doldrums, with Goldman Sachs posting weak results in fixed income trading and Citigroup missing analysts’ forecasts for the second consecutive quarter.

….There is still little confidence that trading revenues will return to previous levels. To try to prop up return on equity, a favourite gauge of profitability in the sector, banks are cutting bonuses. Goldman reduced its ratio of pay to revenue to 36.9 per cent, a percentage point lower than last year.

Returns are being limited by regulatory action, particularly new requirements to hold more capital. In the latest move, the Office of the Comptroller of the Currency said on Thursday it was raising the standards it expected for risk management at the largest banks.

It’s still early days, so take this as tentative evidence only. The real evidence that bank regulation has been effective will be longer-term signs that we’re truly seeing a de-financialization of the economy, with the finance industry making up a smaller share of GDP than it has in the past. We’ll only know if that’s happening once all the new regs have been in place for a while and the banks have had a good chance to figure out if they can game them. If they can’t, and finance becomes permanently a smaller share of the economy, we’ll be able to say that Dodd-Frank and Basel III were relatively successful. Until then, we’ll have to wait and see.

WE'RE TAKING A SHORT BREAK…

from the big banner at the top of our pages asking for the donations that make Mother Jones' nonprofit journalism possible. But we still have upwards of $300,000 to raise by June 30, whether we get there is going to come down to the wire, and we can't afford to come up short.

If you value the reporting you get from Mother Jones and you can right now, please join your fellow readers who pitch in from time to time to keep our democracy-advancing, justice-seeking journalism charging hard (and to help us avoid a real budget crunch as June 30 approaches and our fiscal year ends).

payment methods

WE'RE TAKING A SHORT BREAK…

from the big banner at the top of our pages asking for the donations that make Mother Jones' nonprofit journalism possible. But we still have upwards of $300,000 to raise by June 30, whether we get there is going to come down to the wire, and we can't afford to come up short.

If you value the reporting you get from Mother Jones and you can right now, please join your fellow readers who pitch in from time to time to keep our democracy-advancing, justice-seeking journalism charging hard (and to help us avoid a real budget crunch as June 30 approaches and our fiscal year ends).

payment methods

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate