Financial system guardrails and incentives fundamentally shape market outcomes, according to Alan Waxman, CEO of Sixth Street. He emphasizes that historical regulatory changes have been pivotal in evolving the American financial landscape.
The lack of separation between commercial and investment banks was a key factor in the 1929 crash. Following this, the Glass-Steagall Act (1933-1999) imposed a stable, though not growth-optimized, separation. Waxman notes that the 1999 repeal of Glass-Steagall aimed to optimize the banking system for globalization, leading to mergers between commercial and investment banks.
This deregulation spurred investment banks to significantly increase leverage to remain competitive. "Liquidity mismatches and leverage are key factors in financial crises," Waxman stated. He highlighted that post-global financial crisis regulations like Basel III and Dodd-Frank were implemented to reduce leverage and improve bank liquidity.
Waxman believes "System three has the potential to be the best financial system America has ever had," underscoring the critical role of government backstops in stabilizing deposit-taking institutions. The evolution of these financial systems demonstrates the enduring importance of robust regulatory frameworks.