3 Reasons The Banking System Might Not Have Improved Since The Financial Crisis

Five years after Lehman's collapse, the biggest banks are bigger, investors think the government will still save them, and the massive financial regulatory overhaul is only partially complete.

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Yesterday, we discussed how, five years after the failure of Lehman Brothers, the banking system has gotten more stable and has become less of a risk to taxpayers. Banks are borrowing less, banks are borrowing for longer periods of time, and investors are starting to lose the expectation that banks will be bailed out should they run into trouble. But that's not the entire story.

Here are three signs that the banking system is actually not that much safer or more stable than when its near collapse almost brought down the world economy five years ago.

There is a lot of work to be done on Dodd-Frank.

Davis Polk / Via davispolk.com

Dodd-Frank, the massive financial regulatory overhaul passed in 2010, still depends on the work of regulators to actually write the rules. And that is still very much in progress — of the 398 rules that have deadlines attached to them, only 160 had been finalized at the end of September, according to the law firm Davis Polk.

This includes the so-called Volcker Rule, which would restrict trading done by banks. Some 22 regulators will eventually have to vote on a final version of the rule — and The Wall Street Journal reported this week that the rule is not expected to be fully written until the end of the end of 2103 and not implemented until July 2014.

The biggest banks have getting about $27 billion a year from investors because they think the government would rescue them if they got in trouble.

Bloomberg Markets / Via bloomberg.com

Yes, the biggest banks have seen some of their borrowing costs go up more than their regional counterparts, but according to a study by World Bank economist Deniz Anginer, the six largest banks have gotten an $82 billion discount on their debt from investors between 2009 and 2011. This is because investors still think there's a bailout coming if one of these big six risks fail. Moody's, the rating agency, placed the debt of these six banks on review for a downgrade because new policies under Dodd-Frank might mean that government support could no longer be forthcoming. But the actual downgrades haven't happened yet.

The biggest banks have only gotten bigger.

Senator Brown

This chart, from Ohio Democratic Senator Sherrod Brown, shows the growth of the six megabanks from 1996 through the beginning of 2010. Thanks to a bunch of acquisitions these banks made during the financial crisis — like JPMorgan's acquisition of Bear Stearns and Washington Mutual, Bank of America's rescue purchase of Merrill Lynch, and Wells Fargo's purchase of Wachovia — the assets of the six largest banks are now worth 60% of the U.S.'s yearly gross domestic product. Many critics think that as long as banks remain this big, they will inevitably be able to resist the regulation that would make them safer — or that just having banks this big is, in and of itself, too big of a risk to the banking system and broader economy.