The global financial crisis (GFC) and the subsequent regulatory and government response changed capital market and economic dynamics in enduring and profound ways. Most of the policies that were implemented sought to strengthen the banking system’s resilience to future crises and reduce the potential for a banking system collapse to be a mortal threat to the global economy. Roughly 13 years later, markets faced a devastating pandemic followed by a remarkable capital market and economic recovery. With the benefit of hindsight, one can conclude that the post-financial crisis regulatory framework for the banking system was extremely successful; the banking system proved resilient to acute economic and market stresses in the darkest days of the pandemic and was in position to assume the responsibility of dramatically ramping up lending through the CARES Act Paycheck Protection Program (PPP). The banking system arguably finds itself now in better health than when the pandemic began: higher Tier I capital, an even greater hoard of excess/total reserves, and loan loss reserves declining at a historic rate—a sign that the excess cash that banks set aside for losses related to the pandemic was ultimately not needed.
However, the resilience of the banking system came with at least one major trade-off: Banks have become increasingly disintermediated from both capital markets and the real economy. On one hand, this has resulted in periods of massive price inefficiencies in capital markets, with knock-on effects throughout the economy. On the other hand, it has created a significant opportunity for alternative lenders and providers of capital.