The Regulatory Cycle in Banking: What Lessons From the US Experience?: From the Dodd-Frank Act to COVID-19

This book analyses the interactions between financial regulation and crises with reference to the experience of the United States in the period after the global financial crisis up to the COVID-19 emergency. The US case has been framed in a more general context, making extensive reference to the theoretical literature that has examined in depth the interactions between financial laws and crises throughout the centuries (and across countries). In the last few years, a new regulatory system for large banks has arisen in the US, reversing some elements of the Dodd-Frank Act and introducing deviations from the prudential rules agreed by the G20 after the financial crisis of 2007-09. This approach is confirmed by some of the measures adopted in response to COVID-19. These signs of a softened approach to banking regulation (and supervision) are also spreading beyond the United States and they can be inferred from a variety of circumstances and institutional contexts This is a sign that the pendulum on financial regulation is swinging back again. The cumulative effect of these trends could force the globally harmonized approach to regulation to be broken down, also in the light of the situation triggered by the COVID-19 pandemic.
A trend towards easing or suspending prudential rules now could expose the international banking system to growing risks in the years to come. In the current exceptional circumstances as well, the international standards must not be breached, as they provide the resilience needed to sustain lending to the economy, and to keep banks safe. It is important to stress that the banking systems that seem to be in a better position to withstand the present shock - having higher average levels and quality of prudential requirements - are those more advanced in the consistent implementation of the G20 international standards. With the memory of the global financial crisis fading and the long post-crisis economic expansion coming to an end, the pressures to dilute the G20 rules could grow stronger. The importance of maintaining a consistent approach to needs to be emphasized.

About the author: Maurizio Trapanese is Director in the DG Economics, Statistics and Research of the Bank of Italy. His responsibilities include research on the international prudential regulation, the cyclicality of financial laws, and the EU framework for crisis management. Previously, he worked in the DG Supervision, where he was involved in the international negotiations on prudential rules. He has participated to international committees at the Eurosystem, EU, and global level, directly contributing to the finalization of the post-financial crisis standards and the EU single rulebook in banking.