Financial Reform’s Breakthrough Year

ZANZIBAR – Here’s an odd prediction for the coming year: 2013 will be a watershed for financial reform. True, while the global financial crisis erupted more than four years ago, and the Dodd-Frank financial reforms were adopted in the United States back in 2010, not much has changed about how Wall Street operates – except that the large firms have become bigger and more powerful. Yet there are reasons to expect real progress in the new year.

The US Federal Reserve is finally shifting its thinking. In a series of major speeches this fall, Governor Dan Tarullo made the case that the problem of “too big to fail” financial institutions remains with us. We need to take additional measures to reduce the level of systemic risk – including limiting the size of our largest banks. News reports indicate that the Fed has already started saying no to some bank mergers.

At the same time, the US Federal Deposit Insurance Corporation has become a bastion of sensible thinking on financial-sector issues. In part, this is because the FDIC is responsible for cleaning up the mess when financial-sector firms fail, so its senior officials have a strong incentive to protect its insurance fund by preventing risks from getting out of control. The FDIC is showing intellectual leadership as well as organizational capabilities – Vice Chairman Tom Hoenig’s speeches are a must-read.

Wall Street is pushing back, of course. But the rolling series of scandals surrounding global megabanks makes it difficult for anyone to keep a straight face when executives insist that our largest banks must maintain their current scale and scope. Do we need HSBC to facilitate global money laundering? Do we need Barclays and UBS to manipulate Libor (a key benchmark for interest rates around the world)? Do we need still more losses at poorly run trading operations for JP Morgan Chase?