The Regulatory Regime and Market Valuation of US Banks

Manila Bulletin, May 29, 2017 | Go to article overview

The Regulatory Regime and Market Valuation of US Banks


By Valentin A. Araneta

The Trump administration has initiated a review of the banking regulations in the US through an Executive Order with a view to "liberalizing" it from the stringent capital and prudential requirements imposed by the policy reforms established after the Global Financial Crisis(GFC). These reforms are encapsulated in the Dodd - Frank Wall Street Reform and Consumer Protection Act of 2010. The professed objective of this policy direction is to enable the banking institutions to make more credit available to the US economy and to make them more competitive with their competitors from other countries. However, it is important to appreciate the reasons for the reforms contained in the Dodd-Frank Act before these are reformed again.

The biggest participants in the US banking system commonly referred to as Wall Street which includes foreign owned banks are widely believed to have taken excessive risks resulting in the debacle of the mortgage backed securities that led to the GFC. Investors lost their life savings, workers lost jobs, the country and the world economy went into recession and taxpayers' money had to be put in into the country's financial institutions because if they collapsed, an even greater systemic disaster would have engulfed the economy. In October of 2008, The Troubled Asset Relief Program (TARP) of the US authorized the amount of US$700 billion of government funds to be infused in financial institutions or to purchase assets to keep these institutions viable and liquid. A total of US$426 billion was utilized and US$444 billion was eventually recovered and the US government came out ahead by US$12 billion.

However, the principal point behind the reforms imposed as a result of this crisis was that the crisis could have been much worse, the TARP and other measures undertaken by the Central Bank and other authorities might not have been enough and the taxpayers' money could have been lost forever. Therefore, the Dodd Frank Act is intended to enhance the risk management and prudential controls of financial institutions, clearly delineating the accountabilities and responsibilities of governing boards and management and closely monitoring their compliance to the regulations. Strong safeguards against " too big to fail" situations are written in into the law and the rules and regulations to prevent financial institutions from putting the government into a situation of having no choice but to bail them out of their problems because their failure would result into a much bigger systemic disaster. …

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