Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

It wasn’t only the bankers to whom Dodd-Frank caused anxiety. Geithner was worried about how it would work in a crisis. He feared that the formalized process of resolution centered on the FDIC would hobble the crisis response. But that put a premium on crisis prevention, and that points to the truly significant change brought about by Dodd-Frank. It perpetuated and institutionalized the stress-testing regime begun in the spring of 2009, and as such it was one of the pioneers of a new type of governance known as macroprudential regulation.56 This required banks to be assessed not simply in terms of their business models but with regard to their impact on macroeconomic stability. Conversely, macroeconomic scenarios were evaluated in terms of their impact on the key banks. Henceforth, the risk of financial crisis was no longer a matter for ad hoc intervention in emerging market economies, as it had been in the 1990s. It was to be a permanent preoccupation of governments across the G20. The Financial Stability Council created by Dodd-Frank gave the Fed and the Treasury and the other regulators a standing platform from which to develop this new form of oversight and control. As the government regulators became ever more sophisticated in their understanding of modern finance, the banks built gigantic compliance teams to interact on a daily basis with the regulatory authorities. It was in the interaction between the two that the truly crucial work was done of defining the rules f...