Dodd-Frank and Basel III’s Skin in the Game Divergence and Why it is Good for the International Banking System

The recent financial collapse has illuminated many problems with the global financial system. One of these problems was that the financial system developed in a way that allowed banks to profit by simply making more loans instead of quality loans. After the financial collapse, regulators scrambled to enact new legislation to better manage the financial system and avoid the problems that caused the collapse. One way in which regulators attempted to improve the system was to remove the ability of banks to generate limitless loans in which the banks had no stake. Two such pieces of regulation, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the new provisions in the Basel Accords (Basel III), attempted to limit the ability of banks to make endless loans. Although the Dodd-Frank Act’s risk retention requirement does a better job in this respect, having diverging systems of international regulation may prove to be beneficial