But many of the legislation’s most significant measures have yet to be put into place, and their ultimate effect on the bottom line remains unclear.
Financial firms have raised major concerns about one of the largest structural changes made by the law, the “Volcker Rule.” This measure would bar banks from engaging in trading and other speculative activity on their own behalf rather than to profit customers. But the rule’s impact could prove limited because of loopholes and exceptions allowed by lawmakers and regulators working to implement it.
One of the main reasons Wall Street rebounded so quickly from its lows is government support.
Even before Obama took office, the government pumped hundreds of billions of dollars into banks. The Federal Reserve, which is independent of the administration, lowered interest rates, allowing firms to borrow money cheaply and trade with it, booking huge profits. The Fed also introduced lending programs that bolstered stock and bond markets and allowed banks to earn a steady return on reserves they kept with the central bank.
“The too-big-to-fail banks got bigger profits and avoided failure because of trillions of dollars of loans directly from the Federal Reserve,” said Linus Wilson, assistant professor of finance at University of Louisiana at Lafayette. “Today, their profits are boosted by lower borrowing costs because their managers and creditors expect a Fed lifeline when markets get jittery.”
Banks also have benefited from the large increase during the recession in unemployment insurance. Increasingly, banks offer debit cards to the unemployed to collect their government benefits. These debit cards carry a range of fees that bolster banks’ bottom lines.
What’s more, states — with their budgets shattered by the financial crisis and recession — have increasingly been moving to enroll new employees into Wall Street-run retirement accounts rather than government pension programs. That’s potentially more lucrative for Wall Street, which can charge fees for managing the savings of individual retirees.
Since Dec. 31, 2008, the largest banks — those with more than $100 billion in assets — have increased their total combined assets by about 10 percent.
As banks get larger, they can become more profitable. This is because investors tend to be more willing to lend them money at interest rates lower than those other banks are charged. There is a common perception that big banks are less risky because the government will still step in to save them if they get into financial trouble. On the flip side, under new financial regulations, the largest banks will have to hold more financial reserves than smaller banks — although precisely how much is still being discussed.