Opinion: Covid-19 shows Dodd-Frank is working
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Opinion: Covid-19 shows Dodd-Frank is working


The largest banks in the US are under immense pressure, but now is not the time to abandon the regulatory progress that has been made

It's been one hell of a year. Take a day off and who knows what you might miss. The Covid-19 crisis and the civil rights movement that followed have been incredibly eye-opening. For much of March and April, our time at IFLR was taken up writing about suspensions, delays, setbacks, concerns: article after article about planned regulatory changes that have been pushed back as a result of the health crisis. It's entirely possible the industry was looking for excuses. Things have levelled out as market participants have worked out how to cope with crying toddlers and lacklustre internet speeds; our coverage is slowly returning to normal.

There have been some positives. Despite being struck by a wholly unexpected blow, the financial sector has remained resilient and handled the pandemic surprisingly well. While M&A may be on hold, inboxes are filled daily of news of record numbers in the capital markets, and the banking sector appears to have learned from its 2008 mistakes. Dodd-Frank is working.

So why, with the end in sight, are banks gearing up to undo all their hard work, by not being more prudent? The largest banks in the US, the systemically important financial institutions (SIFIs), are under immense pressure as the economy strains. Things may well get worse over the next few months. Covid-19 numbers aren't going down and public spending is a long way off where it was in 2019. Unemployment in the US is still sitting baove 11%. International travel is a distant memory.

So why are the US SIFIs still paying dividends to shareholders and to executives, and why are they even contemplating the resumption of share buybacks? Things might appear broadly stable at the banks, but that could change very quickly. If any bank later needs a bailout and the only way to finance that is from the public coffers in some form of Robin-Hood-in-reverse rescue, it would not go down well. A whole is only as great as the sum of its parts. Banks need customers.

Banking regulators should be taking steps to encourage banks to hold on to capital, to keep a strong and stable buffer that can be deployed to absorb losses if things get worse. Consumers and corporates are going to continue to need bank lending; if it dries up much more there could be dire consequences.

Regulators such as the OCC, the FDIC, and most importantly the Fed, should in the short term at least prevent buybacks and shareholder dividends, executive bonuses, and any other payout designed to lower capital buffers. Current measures seem to be more aligned to encouraging this behaviour.

These regulators should be more cautious this time around. Things might be better than they were during 2008, but not by much – and even still, it's hardly a high bar. Taxpayers should not bail out bank shareholders. They've got enough problems as it is.

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