Reforms Have Made Banks Safer but Markets More Brittle
By Greg Ip
In the decade since the global financial crisis the U.S. financial system in many ways is much safer, with banks far less likely to fail or need a taxpayer bailout. …Yet Karen Petrou, head of Federal Financial Analytics, a regulatory advisory firm, says it is a fallacy to believe that “safer banks means safer markets.” As intermediaries, banks buy when others want to sell, lend when others want to borrow, and vice versa. If banks become safer by retreating from a market, less-regulated players will move in and the market becomes more dangerous, she said. “Fortress banks mean all the fun is outside the walls.” …“This may make the market safer, but only because it makes the Fed still more indispensable and market discipline even less relevant,” Ms. Petrou says.