The Financial System Remains Too Fragile, Too Distorted, Too Dangerous

Anat R. Admati is the George G.C. Parker professor of finance and economics at Stanford University Graduate School of Business and the co-author of "The Bankers New Clothes: What's Wrong with Banking and What to Do about It."

Updated April 14, 2016, 3:20 AM

The financial system remains much too fragile, distorted and dangerous. Too little has changed since the crisis. The problem is that policymakers have failed to take much stronger steps that would make the system safer and healthier and protect the public better.

The Federal Reserve has the authority and tools under the Dodd-Frank Act to address the too-big-to-fail problem. But many of those involved appear blind to the risks and lessons from the crisis.

Regulators have significant authority, but they often fail to use it effectively. Some of the rules put in place are overly complex, costly and flawed, creating the pretense of being “scientific” or tough. Meanwhile, simple and beneficial steps are overlooked, such as ensuring that risky investments are made with much more equity funding and less debt that creates unnecessary risk and can distort investments.

The Dodd-Frank Act promised to end “too big to fail.” Yet the largest financial institutions remain enormously complex, opaque and dangerous. Their disclosures are so poor that experts consider them “uninvestible black boxes.” Regulators fail to reduce the opacity of these institutions and of the system. They give false reassurances again, using measures similar to those that lulled everyone into a false sense of safety before the financial crisis. The problem is not simply bailouts. We would not let cars drive at reckless speeds, or let planes fly too low, even if the costs of the ambulances were covered by the corporations that own them. The largest institutions are reckless every day. They appear too large and complex to manage or regulate.

The Federal Reserve has plenty of authority and tools under Title 1 of Dodd-Frank to address the too-big-to-fail problem, yet nearly five years after the Act was signed into law, it still fails to bring about sufficient change. Many of those involved appear blind to risks and to key lessons from the crisis. Spin and flawed narratives obscure reality, confuse the public and muddle the debate.

Our overly complex financial system is testament to the failure of previous regulations. This failure must be used to teach us how to do better rather than as an excuse to maintain the status quo by vague warnings about the “shadow banking system.” A good start would be to shine more light on the risks that the largest institutions hide from investors and regulators in opaque markets and “off their balance sheet.”

The main obstacle to financial reform is the lack of political will. To fix banking, we must hold policymakers who fail to protect us accountable. Let’s not wait until this bad financial system we are tricked into tolerating collapses on us again.