5 years after Lehman: bank regulation incomplete

Five years after Lehman Brothers collapsed, the huge job of preventing the financial sector from bringing down the US economy again remains an unfinished work. The gargantuan Dodd-Frank reforms, 2,300 pages of new regulation, were adopted in July 2010 by Congress as the devastation wrought on the US economy by the out-of-control financial sector was just being understood. But its entry into force still awaits a broad range of rulemaking and interpretation, and faces resistance from banks still reticent to admit their faults. At the beginning of September, just 40 percent of the Dodd-Frank provisions had been finalized and integrated into law, according to a report by the law firm Davis Polk. "We've made progress, but there's still a bit of road to go," admitted a senior US Treasury official. Among the achievements, the largest US banks -- most of which had to be propped up with government funds during the crisis -- have had to create "living wills" that will map out how they should be liquidated, with minimal collateral damage, if they run into serious problems. They have also been forced to undergo annual "stress tests" to prove that they could hold up against a new crisis even worse than the one that Lehman detonated in 2008. Also, such requirements are to be applied by the Federal Reserve to the largest non-bank financial institutions, like insurer American International Group (AIG), which had to be bailed out. That has had some impact. In the round of tests earlier this year, only one of the 18 largest banks failed -- Ally Financial, one of the institutions bailed out in the crisis. Dodd-Frank also created a new group, the Financial Stability Oversight Council headed by the Treasury secretary, charged with identifying risks to the US financial system and responding to them. One key provision of Dodd-Frank remains unfinished, and toughly resisted by banks. The "Volcker Rule" would force banks to stop financial and other trading activities aimed at generating profits internally, activities that were at the heart of the crisis. But banks want to stay in that business, many seeing their trading offices as important centers of profit. Paul Volcker, the former Federal Reserve chairman for whom the rule is named, told The Wall Street Journal this week that not having completed the rule after three years is "ridiculous". Despite gains in regulation, the largest banks, those called "too big to fail" -- too big for the government to allow them to collapse and wreak havoc on the economy -- still leave many uncomfortable, five years after Lehman's collapse. They are now much larger, with more concentrated power. The 10 largest banks had $10.97 trillion in assets in June 2012, compared with $7.81 trillion at the end of 2006. The worry about them was further inflamed after the massive loss that JPMorgan Chase, which proudly survived the crisis in better shape than most, revealed massive losses from an out-of-control derivatives trading operation in its London office last year. That confirmed for many that commercial banks need to be forced to give up their non-banking operations, as was the case before the 1999 US deregulation. Critics want to reinstate the 1933 Glass-Steagall Act -- itself a product of a deep crisis -- that separated commercial banking from investment banking. "This is the only way to address the flaws in the system," said Paul Roberts, a former under secretary of the Treasury. Even so, the very architecture of US financial sector oversight, with its large number of different bodies and a maze of rules, generates worries. In late August the international Financial Stability Board, which comprises central bankers and regulators from 24 countries, pointed to the complexity and fragmentation of the US system.