Regulatory reform since the financial crisis

Discurso de Dan Tarullo

"The New Deal reforms, engrafted onto preexisting restrictions in the National Bank Act and state banking laws, largely confined commercial banks to traditional lending activities within a circumscribed geographic area, while protecting them from runs and panics through the provision of federal deposit insurance and Federal Reserve discount window access. At the same time, investment banks and broker-dealers were essentially prohibited from affiliation with traditional banks. This approach fostered a system that was, for the better part of 40 years, very stable and reasonably profitable, though not particularly innovative in meeting the needs of savers, on the one hand, and of households and businesses wishing to borrow funds, on the other.

Beginning in the 1970s, the separation of traditional lending and capital markets activities began to break down under the weight of macroeconomic turbulence, technological and business innovation, and competition. The dominant trend of the next 30 years was the progressive integration of these activities, fueling the expansion of what has become known as the shadow banking system, including the explosive growth of securitization and derivative instruments in the first decade of this century.

This trend entailed two major, and related, changes. First, it diminished the importance of deposits as a source of funding for credit intermediation in favor of capital market instruments sold to institutional investors. Over time, these markets began to serve some of the same maturity transformation functions as the traditional banking systems, which in turn led to both an expansion and alteration of traditional money markets. Ultimately, there was a vast increase in the creation of so-called cash equivalent instruments, which were supposedly safe, short-term, and liquid. Second, this trend altered the structure of the industry, both transforming the activities of broker-dealers and fostering the emergence of large financial conglomerates.

Though motivated in part by regulatory arbitrage, these developments were driven by more than regulatory evasion: Such factors as the growth and deepening of capital markets and the rise of institutional investors as guardians of household savings accelerated the fracturing of the system established in 1933. Whatever the relative importance of these causal factors, however, one thing is clear: Neither the statutory framework for, nor supervisory oversight of, the financial system adapted to take account of the new risks posed by the broader trend. On the contrary, regulatory change for the 30 years preceding the crisis was largely a deregulatory program, designed at least in part to address the erosion of banks’ franchise value caused by the rapid growth of credit intermediation through capital markets."