Cornelius K. Hurley
Director, Boston University Center for Finance
Stephen Kingsley
Senior Managing Director, Economic Consulting, FTI Consulting
John C. Dugan
Partner, Covington & Burling
Mark Carawan
Chief Internal Auditor, Citigroup
Simon Samuels
Managing Director, European Banks Equity Research, Barclays Capital
Issue 6 - December 2011
The Impact Of Global Financial Reforms
The financial crisis spurred significant regulatory reforms including the Dodd-Frank Act. Six top financial leaders discuss whether these reforms can truly prevent another meltdown.
When the September 2008 financial crisis roiled markets around the world, it set in motion a re-examination of how banks manage their retail and investment sectors and spurred reforms designed to prevent another meltdown. In July 2010, the United States passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires that large financial institutions have “living wills” that spell out how they will protect assets in the event of a crisis and even plan for resolution or bankruptcy. In September 2010, global banking regulators announced the Basel III reforms, which require the largest banks to triple the size of their capital reserves. The Vickers Report, released in September 2011 by the Independent Commission on Banking, would require Britain’s large banks to protect private checking accounts, mortgages and other retail operations with a “ring fence” that would screen out riskier investment and global banking activities.
FTI Consulting recently gathered six of the world’s top financial leaders to discuss the financial crisis, the new reforms, and whether they can truly protect global markets from another meltdown. Discussion leaders were former Federal Deposit Insurance Corporation Chairman William M. Isaac, who is now Senior Managing Director and Global Head of Financial Institutions at FTI Consulting, and Stephen Kingsley, Senior Managing Director in FTI Consulting’s London office. The panel comprised Mark Carawan, Chief Internal Auditor at Citigroup; John C. Dugan, former Comptroller of the Currency and now a partner at Covington & Burling; Cornelius K. Hurley, Director of Boston University’s Center for Finance, Law & Policy and Senior Provost Fellow Professor of the Practice of Banking Law; and Simon Samuels, Managing Director, European Banks Equity Research at Barclays Capital.
WILLIAM M. ISAAC: We have four topics to cover, and we will lead off with John Dugan. The first question: Will the global financial reforms prevent the next crisis?
JOHN C. DUGAN: I don’t think we’ll ever fully prevent the next crisis, whatever it will be. I do think it was very important to increase the amount of common equity capital in the banking system. Once we did that, the crisis began to ease. But there has been too little work done on developing liquidity standards for the banking system, and I don’t think what is being put in place now is right yet — it needs a lot of work.
ISAAC: Was Dodd-Frank necessary? Regulators have always had the authority to deal with capital and liquidity issues.
DUGAN: I think the most important thing was to raise capital across the board, not just in the United States but also in other countries. You need an agreement among regulators, but you didn’t need Dodd-Frank for that or for setting new liquidity standards. Dodd-Frank addresses those subjects, but they’re not really at the heart of what Dodd-Frank gets at. I do think some of the Dodd-Frank reforms were necessary, especially the regulation of systemically significant nonbanks — but some reforms went too far.
CORNELIUS HURLEY: We are not better off with Dodd-Frank, mainly because there’s no structural reform. We’ve just nibbled around the edges. The Vickers Report proposes real structural and competitive reform.
I would have recognized the too-big-to-fail genie for what it is: a loose, destructive spirit in the land. Dodd-Frank called every financial institution over $50 billion systemically important, and that’s just not credible. The Vickers Report suggests a much more reasoned approach. It would confine the retail bank and allow the separate investment bank to do proprietary trading.
SIMON SAMUELS: I personally think the crisis was fundamentally about credit underwriting standards and liquidity. And ultimately the reason why Lehman fell was not from its starting position of capital, which was fine. It was due to a liquidity failure because people didn’t trust the underwriting.
DUGAN: I also believe that if we’d had some bare minimum mortgage underwriting standards, real documentation of income and even modest down payments, the whole crisis would have been much smaller. I would say, though, that a lot of people thought Lehman was very undercapitalized.