Have We Created Frankendodd?

has been made since 2008.” Stronger asset and balance sheets and a doubling of capital and liquidity levels since 2009 have made the banking system “far stronger and more resilient.”

Dearie further suggested that requiring banks to hold higher levels of capital, while prudent, has increasingly come to be seen as something of a panacea.

“Capital in recent months has emerged as not only a centrally important issue but seemingly a silver bullet solution to virtually every supervisory challenge, whether those challenges be associated with large institutions or funding structures, wholesale deposit, et cetera,” he said.

Not only are higher levels of capital subject to the law of diminishing returns, “ever higher capital can even become perverse. It can actually incentivize greater risk taking … which is certainly not the objective of the higher capital policy,” Dearie said.

Sitting on the panel with Dearie were Barth, Larry White and David Skeel. White is the Robert Kavesh Professor of Economics at New York University’s Leonard N. Stern School of Business. Skeel is the S. Samuel Arsht Professor of Corporate Law at the University of Pennsylvania Law School and author of The New Financial Deal: Understanding the Dodd-Frank Act and Its (Unintended) Consequences (Wiley, 2011).

Barth asserted that the financial crisis originated in the housing sector and “began to emerge more fully in the summer of 2007, spread throughout the financial system and that, in turn, led to the recession in December of 2007, which ended in the summer of 2009.” But in the view of White, “too big to fail” was at the heart of the financial crisis.

A key objective of Dodd-Frank is to circumvent the government’s bailout of institutions whose failure, in theory, could cripple the economy of the United States and the world. Conference attendees consistently questioned whether the law would accomplish that or other goals. “If we have another crisis, will [the government] bail them out all over again?” asked Skeel. “In my view, this doesn’t end too big to fail. Not at all.”

Skeel, the conference’s final presenter, admitted being “sort of overwhelmed by the problems and complexities that we’ve talked about over the last couple of days.”

“The few things we’re pretty sure would work as a practical matter … are politically impossible. The things that are politically possible … it’s not at all clear that they’ll work.”