Humbling Wall Street?

An article by Nathaniel Popper and Peter Eavis in the New York Times spells out the various ways in which Wall Street has been humbled since 2007 and suggests that it's not all due to Dodd-Frank:

...industry executives and regulators alike agree that the broad reshaping of the industry has been driven primarily by the efforts of the Federal Reserve and other regulators to strengthen the amount of capital held by big banks, measures that banks have had less success in lobbying against.

In the simplest sense, the rules about capital require banks to effectively spend a portion of a limited financial resource — their capital — every single time they take a risk by making a loan or a trade. The riskier the trade or loan, the more capital the bank has to allocate.

Banks can increase their pool of capital by raising more money from investors or holding onto profits, but doing so generally costs money and reduces profits accruing to shareholders, which typically include employees of the bank.

The capital rules have had the effect of encouraging banks to focus on parts of their operations in which they are potentially taking fewer risks — like the divisions that manage money for pensions and investors — and de-emphasizing the trading desks.

[Vinnie Rotondaro is NCR national correspondent. His email address is vrotondaro@ncronline.org.]


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