NEW YORK–The nation’s big Wall Street banks are no safer today than they were prior to the financial crisis of 2008, even though numerous new rules have been enacted with a goal of improving safety and soundness.
That’s the conclusion of a new paper co-authored by former Treasury Secretary Lawrence Summers. The paper, presented yesterday at a Brookings Institution conference, was co-authored by Harvard University economist Natasha Sarin. In the paper the two authors used a range of financial market data to measure bank risk, including gauges of volatility and expected returns, according to the Wall Street Journal. The idea that banks are better capitalized, the paper argues, should be reflected in their stock prices—the less risky they are, the lower the expected return on bank debt, bank preferred stock and common stock, the Journal stated.
But the authors say that is not what they found when they looked at the biggest U.S. banks and their counterparts around the world, according to the Journal analysis.
“To our surprise, we find that financial market information provides little support for the view that major institutions are significantly safer than they were before the crisis and some support for the notion that risks have actually increased,” the authors stated.
According to the Wall Street Journal, “the findings carry major implications for policy makers who have spent the past six years drafting and implementing a sweeping set of new rules designed to shore up the resilience of the financial sector. Policy makers have repeatedly insisted that the initiatives, from annual stress tests to stricter capital requirements, have made the system safer than it was before its near-collapse in 2008.”
The authors added that the findings could give ammunition to critics of all of the new regulations created since 2008, especially those who argue that regulators haven’t done enough to address the problem of banks whose failure could take down the financial system—“too big to fail” banks, the Wall Street Journal reported.
In the paper, the economists say their findings “suggest cause for concern that there is a nontrivial probability of at least a major loss in equity value by a major institution sometime in the next few years,” according to the Journal.