[picapp align=”center” wrap=”false” link=”term=barney+frank&iid=9183036″ src=”http://view1.picapp.com/pictures.photo/image/9183036/senate-house-conf/senate-house-conf.jpg?size=500&imageId=9183036″ width=”500″ height=”329″ /]
The long-debated financial regulation bill finally emerged from the Congressional reconciliation process just minutes before sunrise Friday in Washington, D.C. The legislation has been hailed as a sweeping reform, but its ability to curtail future crises is less than certain.
“Banking is a fundamentally risky business,” said Robert McDonald, a professor of finance. “Banks making bad loans is the oldest cause of banking crises, and nothing in the legislation is going to fix that.”
McDonald also points out that non-bank institutions like AIG, Bear Stearns, and Lehman Brothers—the straws that broke the economy’s back—will be more or less unaffected. “Much of the new regulation will have nothing to do with what caused the financial crisis of the last few years,” he said.
But certain pieces of the legislation are more forward looking, like the Volcker rule which limits banks’ use of insured depository funds to trade in derivatives. The idea behind the regulation “would be to prevent future crises that don’t look like the past crisis,” he said.
McDonald thinks the legislation’s success will partly hinge on bringing non-bank institutions under the more tightly controlled banking umbrella. Furthermore, much of the pro-consumer language could go a long way toward preventing some of the mortgage abuses that occurred in the past, he said.
Though the negotiated bill may be the largest overhaul of financial regulation since the Great Depression, McDonald is still a bit disappointed with the outcome. “I wish I could see more of a guiding theory” behind the legislation, he said. “It’s a little bit piecemeal.”