Financial crises are, at their core, caused by excess leverage .... Part of what made this crisis so severe was that capital requirements failed to keep up with risks and failed to force firms to prepare for the possibility of a very severe recession ... This mistake was made worse by the fact that we allowed a large parallel financial system — composed of investment banks, consumer finance companies, and firms like AIG — to grow up alongside the regulated banking system. In that parallel system, firms were allowed to operate with very thin capital cushions and to finance their activities with short-term, unstable sources of funding.

The House and Senate reconciled their versions of the bill [JURIST report] last month but were forced to re-open negotiations, eventually removing a $17.9 billion tax on large financial institutions that was meant to cover the bill's costs. The Senate approved its version of the bill in May, after the House passed its version [JURIST reports] in December. The Senate Banking Committe [official website] proposed a bill [text, PDF; JURIST report] in 2009 that was met with resistance and resulted in the committee's development of the bill ultimately passed by the Senate. One provision in the bill that has been the source of much debate is the creation of a consumer protection agency. The House Financial Services Committee [official website] had approved a bill to create the agency in October, after originally delaying [JURIST reports] it at the behest of financial industry leaders in July 2009. The creation of the agency is a key step in achieving the Obama administration's stated goal of tightening financial industry regulations. Last June, the administration proposed a broad series of regulatory reforms [press release; JURIST report] aimed at restoring confidence in the US financial system.