Dodd Frank - 5-years on

It is just over 5-years since the anniversary of the Dodd-Frank Act and controversy continues as to whether it goes too far (with overwhelming financial regulation restricting credit to a needy economy) or not far enough. In fact, some pundits are seeking in fact a new version of the Glass-Steagall Act of 1933 prohibiting deposit taking and risky trading activities, thus mitigating TBTF issues. In a recent article in the FT by Barney Jopson, this issue is weighed by Barney Frank, one of the architects of the law. He argues that Dodd-Frank prohibits bailouts of of insolvent institutions and thus properly sets bank regulation.  

He also points to the well respected Canadian banking market as a nearby example of big not being necessarily bad.  Further, Dodd-Frank requires bigger capital buffers and living wills to facilitate wind-downs of banking institutions. Just last week certain US banks were made subject to a capital surcharge based on two two tests, one the Basel framework (considering both systemic interconnectedness plus size) and the other on the degree of short term funding levels.  

This surcharge hits JP Morgan Chase with a 4.5% add-on or $12 billion in fresh capital needs upon implementation by 2019 unless measures are taken to re-jig the balance sheet.  Such moves may also impact dividend payouts and buybacks, which keep equity investor returns up.  Interestingly, US banks continue to impress, with attractive JPM earnings recently announced, Wells Fargo & Co. being named the planet's most valuable bank eclipsing the Chinese (as per the WSJ), strong revenues at Citi, and finally both Lloyd Blankfein and Jamie Dimon joining the billionaires club on the back of their stock awards (according the Bloomberg).  Maybe European peers should take note?

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