There’s been a fair amount of discussion on whether we should measure the success of financial reform by bank profits. While that may be one useful metric, it shouldn’t be the only — or even the pre-eminent way — we evaluate the Dodd-Frank bill, given that the primary goal of of the bill wasn’t to have less-profitable banks but safer ones. Sometimes those two things go together — when you reduce risk, you get less profit and more safety — but not always, which is why I like Matt Yglesias’ take on the issue.
A better metric is how banks are making their money, which is why this article should get some attention:
Tighter regulatory requirements are compelling giant investment banks in the U.S. and Europe to tone down their risk-taking and shift to more staid strategies. Now hot on Wall Street: trading securities for clients, processing trades, exchanging currency, managing assets and advising clients on deals and financing.
As you can see, banks are expecting to be less profitable as the financial-reform bill is implemented, but what’s important is that they’re taking less risk and engaging in activities with more social benefits than mere speculation. As an aside, I’ll note that everyone citing current financial-sector profits as evidence that Dodd-Frank won’t work is being ridiculous: The law hasn’t been on the books for three months yet! Of course it hasn’t affected overall financial-sector profits yet.
— Tim Fernholz
