fees for packaging the mortgages into new securities and they could sell those new mortgage-backed securities (MBSs) to other financial institutions, including banks, insurance companies, and pension funds around the world (Richardson, 2012). These other financial institutions bought the MBSs because credit rating agencies said they were safe and by fuelling the demand for MBS and related securities, credit rating agencies encouraged a broad array of financial institutions to make the poor investments that ultimately toppled the global financial system. The 2008 financial crisis had exposed the weaknesses of the archaic and fragmented financial regulatory system. Financial institutions had exploited the crevices between regulatory agencies and no agency had overall responsibility for monitoring financial stability (Wessel, 2016). For example, even when risks were noticed, inconsistent mandates interfered with effective response. Thus, a new regulatory framework has to be developed to enhance the resilience of the global financial system while at the same time not jeopardizing the financial system’s flexibility and ability to fully support innovation and growth of the world economy.

In the US, the Dodd Frank Act requirements have made the financial system safer and more resilient (Dodd–Frank Wall Street Reform and Consumer Protection Act, 2010). First, big U.S. banks are in better shape now than they were at the time of the financial crisis, in large measure because regulators have forced them to hold bigger capital cushions, which means they can absorb bigger losses without endangering each other and the whole financial system (Dodd–Frank Wall Street Reform and Consumer Protection Act). Had today’s capital framework been in place in 2007, the largest, most complex financial institutions would have been required to hold roughly twice as much common equity as they actually did. With greater common equity, fewer banks would have needed government rescue. Now, periodic stress tests, supervised by regulators, have forced bank managers to prepare for worst-case scenarios. The fraction of loans that aren’t being paid is half what it was at its peak in 2010.