The Dodd Frank Act Term Paper What the Dodd Frank Act Is The Dodd-Frank Wall Street Reform, better known as the financial bill, was signed by President Obama on July 21, 2010. The Act was basically passed to possibly prevent another 2008 financial crisis from occurring. It provides significant changes to the structure of federal financial regulation and new requirements that apply to market assistants. Due to this there are many acquisitions that can occur. The Act has made a huge changes in our financial system.
For example, bringing together all the agencies and trying to identify any risks that may be rising in our financial system. However, one main problem that happened before the recent crisis was there wasn’t any one in charge who specifically looked at the system as a whole. Since then, regulators have been trying to identify risks that might be rising as the economy changes and the financial system changes going forward. But passing the law is only the first step; it far from being whole.
The regulators have to implement these laws which mean they must arrange important rules and regulations that will make financial firms solid. The act regulates many different kinds of risks, but does not control the overall demand for risk between financial institutions or deal with advantages and issues. After the huge financial crisis, we needed a change and needed something that was going to work fast, be extremely efficient and help our economy get back on the right path.
The Dodd Frank Act has been very beneficial and will hopefully continue to keep improving throughout the next couple of years to get our economy the way it used to be. If we experience another horrible crisis it will be devastating, but if we have the right tools and a good head on our shoulders we might just be able to push through it smoothly. What the Dodd Frank Act does So what does the Dodd Frank Act actually do? A majority of people believe that the results of this Act have reflected positively on the financial industry, but there are others who have disagreed.
The Act has brought the most compelling changes to the financial institution in the United States since the regulatory reform that developed after the Great Depression. It represented a massive change in the American financial regulatory environment and, due to this change; it has affected all Federal financial regulatory agencies and a decent amount of aspect of the nation’s financial services corporation. Many believe that it is much too early to pass judgments on the Dodd Frank Act, but there have been financial scholars who have been known to criticize the act.
They argued that the revision was inadequate to prevent another financial crisis. They also questioned if the reforms had indeed gone too far and would restrict banks and other financial establishments to make loans. As a result, there have been a lot of major banks who have lobbied, or attempted to influence decisions of Congress to approve exceptions to trading derivatives. Financial institutions have spent more than $150 million on lobbying for the second year in a row in 2011. Since then, their focus shifted from Congress to the regulators themselves.
This Act seems to be extending the economic slowdown. The recent financial crisis was terrible and devastating for many people and the economy. This crisis had led banks to stop lending to each other, severely hurt the credit market, and our biggest financial institutions almost collapse. If the Dodd Frank Act had been proposed at that time, maybe some of the damage would not have been as awful. Instead, the crisis led to a recession and millions of Americans were out of their jobs and also forced smaller businesses to close down. The Dodd Frank Act is strictly aimed at the largest firms.
These larger firms were the ones that were most responsible for the crisis because they present the most risk. Small banks were more so the victims of the financial crisis and hundreds of them were failing heavily due to big banks risky. These lower banks went to Congress and asked them to strengthen financial regulations. Community banks will pay lower premiums and will continue to work with their regulators. From my perspective, due to the 2007 to 2009 financial crisis currently ending, the Dodd Frank Act is significantly rising.
This is not necessarily considered a good thing because this might lead to the Act trying to cover too much territory and that is one of the main complications with it. There could become problems related to the Act not being able to cover as much as it says it could; disappointing a lot of people in the economy. Rather than the Act resulting in a less risky market, it could ultimately turn around and the opposite could occur. It could end up leading to great price volatility. We cannot expect to rebuild the economy overnight; we can only try to restore the confidence in our financial systems.
Some of the basic objectives of the Act include improving the confidence of the public in the financial system, attempting to prevent another financial crisis, and recognizing any asset to be diminished before and if another financial dilemma were to occur in the economic future. It also gives financial intermediaries new authority and creates a new action to approach systemic risk. The Dodd Frank Act has given the United States government more funding and information, hence, giving them more power in return. It also affects an increase in regulation of the financial services industry.
Because of this increase in regulation, the Act supports regulators with authority to write new rules. It will be quite some time until we are able to see how effective this increase will advance the Act’s goals. With all of these aspects of financial markets from consumer protection, to looking at the too-big-to-fail issue, lawmakers are continually writing the rules and some are even expected to be in effect this year. There are multiple myths about the Dodd Frank Act. The Act transformed our financial system completely. It helps banks to keep more capital and tries to prevent bad loans.
It shuts down powerless regulators and urges that the ones that continue share information to improve the next financial stops that seem to have trouble. There is still a lot that needs to be done to ensure that this Act succeeds. Congress needs to continue to provide oversight. The Dodd Frank aims at the housing markets that are the most risky. Lenders can no longer produce loans for people who are unable to pay them back in the future. Also, brokers cannot try to influence borrowers to higher rate loans and people who sell risky securities must support a good financial involvement.
The Volcker Rule is one of the more important parts of the Dodd Frank Act. The Volcker Rule tries to ban proprietary trading within banks and prohibits banks and from bond trading for their own account. This makes it hard on banks, especially the bigger banks. The first problem with this is that it is obvious that the role of banks is to help make markets in financial instruments and also to eliminate many trades for the clients. Paul Volcker doesn’t like proprietary trading by banks. Barack Obama wanted to hear Volcker’s ideas, so he had the right to put his thoughts in the Dodd-Frank bill.
There have been numerous complaints from foreign countries regarding the Act’s effect on sovereign debt. Democrats signed a letter stating that teachers, private employees and police officers stand to lose because of the rule. Regulators are being urged to simplify it but have come across an impossible problem. This problem is how to prohibit bond trading while retaining bank activities that are crucial to the health of the capital markets. An example of this would be banks provide money for all types of debt securities and buy or sell bonds at the market price, however, these banks to add liquidity to these markets.
Without this liquidity, spreads between bids and asks would harder to deal with and this would make it more expensive to buy or sell securities. Due to this, U. S Treasury sells its securities cheaper, but aggravates issuers of foreign sovereign debt. Dodd-Frank was issued to prevent financial crises in the future; no one has been able to blame bank proprietary trading in weakening banks before the financial crisis. Since the crisis bank lending has slowed and banks have started to play a major role for larger capital markets.
As a result, my view of this would be that good banking policy means allowing banks to trade for their own account. For years now, companies who are large enough to accept the securities market have been able to have their financial needs be less expensively by assigning bonds, notes and commercial paper rather than borrowing from the banks. Bank proprietary trading has many benefits. An example would be it provides banks with a revenue flow other than lending. Regulations of Dodd Frank Act The Act has introduced new regulation of hedge funds.
Hedge fund managers have reported recently that the Dodd-Frank Act has increased investor demand and also transparency. This has certainly been considered a positive for the financial industry. These managers also expect that operational cost will increase due to the rise in costs of regulations in the Act. There are many managers from hedge funds, as well as management firms who were asked to take a detailed survey online and half of them were from funds with asset under management of over one billion dollars. Now that the Act has been passed, one of the new rules will require hedge funds to disclose their assets.
An implication for hedge funds is that it requires all of the larger hedge fund counselors to register with the SEC. Some of the new rules also have some implications. The main argument for hedge funds is to generate systemic risk. During the financial crisis hedge funds actually help up well due to how bad the economy was, so there were no major blow ups, but on the other hand the equity market fell twice. Hedge funds must also try to consider greater investments in technology, as well as operations because being involved in other investments is important.
The Dodd Frank Act urges all hedge fund advisers to register with the SEC. This is important because they need to maintain records about their business practices. The SEC has given great power to expand its authority in the future. The new hedge funds will depend on the rules written by regulators. The hedge funds will only continue to grow in size and improve the Dodd Frank Act. The Dodd Frank Act has had many potential effects on credit rating industries. It creates a “right of action” for investors to sue credit ratings agencies because of failure to rule an inspection of the facts.
It also requires credit rating agencies to acknowledge information that comes from a source other than the organizations being rated. One of the main conflicts between Dodd Frank and Basel III is the role played by ratings agencies. The financial crisis stressed weaknesses in the asset securities market. This included a decrease in market practice by participants in securitization. The Derivatives Markets Transparency and Accountability Act was designed to repair the Commodity Exchange Act and to bring greater transparency, as well as accountability to markets.
Other benefits of this Act would be it provides financial reform, protects investors and consumers, and has control over-the-counter derivatives markets. One of the big issues here is that there has been excellent structure for the derivatives market throughout the financial regulatory reform. It requires banks to recognize a swaps-dealing activity which has been regulated by Congress. The Dodd Frank Act involves executive compensation and corporate governance reforms that apply to only public companies. The SEC has just started working on proposing its corporate governance and will not finish until later this year.
There is still a lot of work to do for the SEC to perform the Dodd-Frank plan for governance. A provision was added recently stating that legislation needs to be provided for reimbursement of annual payment and a majority of the Federal regulators are in the process of introducing new rules to help utilize these provisions. Many economists and bankers have questioned how convincing the Dodd Frank Act has been. It may not be able to limit a bank that is failing from scaring the financial system. It has not given regulators the power to let too big to fail banks become defeated.
People believe that banks are now here to stay because there have been new rules put into place, since the financial panic, that are just not strong enough to allow banks to fall without risking failure. The FDIC stood up and tried to end too big to fail when it issued rules demanding that large banks create their own power. Failure of even one bank can cause runs on other banks and harm the economy After the crisis in 2008, there were many financial issues that needed better regulation. Institutions turned out to be surprisingly okay with taxpayers because they were too big to fail.
The Dodd Frank had attempted approach these issues, but there is even more risk than ever before, making it hard for the Act to attempt to help. An example of this would be Moral hazard; if banks or their creditors believe they will be freed when in danger of failing, they might not take the correct precautions. I feel that the Dodd Frank Act is not capable of curing the too big to fail. This means that banks are so big that their failure could cause more banks to fail. As a result, this could spread economically.
In order to take these small steps in treating it, there needs to be specific details of the process of assessing the Act is identifying, taking over, and analyzing great amounts of financial institutions before they fail. We should not allow individual banks to become so big that the system feelings threatened, because the system could end up becoming even more risky in the future. The problem is the reduction of political effect on all parties. Typically laws are made to provide people with rules, but the Dodd Frank Act is not technically directed at just any person, it is more so directed at people who are higher up in a certain position.
When this Act was passed, people thought that organizing this Act and cleaning it up would take only about a year to a year and a half tops, but this wasn’t even close to what they predicted. Politicians have strongly tried to step up the progress of the Act and be more encouraging when speaking in public. This is a good concept to think about because if people see that these politicians are excited about the topic and think it will be worthy to the economy, they will more likely support it. The Act was expected to reduce very large costs grouped ith financial weaknesses, as well as systematic risk. It has made a positive outcome in that its leading focus is on the market failure, or systemic risk, of the recent financial crisis. All past financial crises have showed that systematic risk comes together when the financial sector is low. When a financial firm crashes during a panic like this, the firm has no way to manage the systemic risk and it is almost impossible to do so. For the first time ever, the Dodd Frank Act is the first Act to provide specific devices for measuring this systematic risk.
The bubble-busts caused extensive losses to investor and consumers, lowered the confidence in the financial markets and hurt the economic growth in the industry. The loss of regulation actually ended up increasing the systemic risk. The Dodd Frank is said to have made the first major attempt to improve financial regulation, however, there has been much debate of whether the Act has addressed all the problems related to the financial crisis. In the future it should lower the leverage, but increase clarity, hence, reducing the systemic risk which is extremely health for the economy.
It shows that the Act if very cost-efficient. Even if people do not believe that the Dodd Frank Act will solve all the problems due to the crisis, by reducing the systemic risk, this will definitely be more profitable in the long-run. Consumer financial protection has been the best since the motion of this Act, because it has not been the main focus of any federal agencies. The Consumer Financial Protection Bureau was passed to help consumer financial markets work better together in making rules more fairly, as well as influencing consumers to look at their economic lives as they are now, and focus on taking more control.
The CFPB is very efficient with working with many different types of people and those who come from many backgrounds, banks, and various institutions, whether they are large or small. Analysis of Dodd Frank Act My outlook on these new regulations is that each of them has really improved the overall economy because even though they haven’t been perfected by any means right now. All these supervisions will certainly be beneficial for future purposes, it may take some time, but only small steps can get this Act to excellence.
New regulations can only help enhance the Act and hopefully they will prevent another financial panic from occurring. Over the past couple of years, critics of Dodd-Frank have had opportunity to make changes to the legislation, but instead they tried to destroy it. Now those critics have been given the liberty of working with regulators to make the system safer. Basically this means they are able to imply to turn back reforms, like the ability of an agency to protect consumers from the awful practices that triggered this crisis in the first place.
The Dodd Frank Act and other regulation have to do with securities and investments that will have an extreme impact on the technology and decisions of financial institutions. There are five indications of new regulation on the industry’s technology and operations. One is areas for consideration, focus on cost savings and efficiency, supplier ties, greater pressure to outsource, and the last one is changes in the service delivery. So what opportunities do companies have in the changes in technology? Some of them are cutting costs, driving greater efficiency, and be more flexible in responding to the business’s needs.
It is clear that this Act will eventually have a great impact on the technology departments of security firms, pushing them to make changes to accounting, risk management and processing. Although the Act has made many benefits to our economy, there is always room for improvement. Demonstrating how individuals can develop long-term savings strategies would be important because there are plentiful people who are in debt, but by being taught or told the right way to salvage money early on in life; this could help them be much better off in the long-run.
The Act seems to be avoiding some bigger issues, so another improvement could be to enhance communication among regulators. They have no requirement to work together to make regulations easier for the things they arrange. There is absolutely nothing in the Act encourages that. One last improvement is establishing global rules. With up to 386 rules required to be enacted by agencies, firms with any business interest in the United States are facing a period of significant change and uncertainty. These rules could be directed more towards other countries as well. Conclusion
Ultimately the Doff Frank Act was an overall good decision to address because as we look forward, it is going to become more and more clear that Dodd-Frank did get some things right; but on the other hand the Dodd-Frank did get some things wrong, Those things are going to need a some extreme attention. After researching about this topic, I think Congress may have to take the initiative to make a legislative change. One example of this would be the concept of derivatives and how we should continue to use derivatives to reduce risk while avoiding the problems related with derivatives due to the crisis.
Overall, however, I think in the future we are going to see that we are not done by any means on managing reform, even with the all the rules in Dodd-Frank. This is because a financial crisis is never the right time to introduce new regulations; we have to ready for it if it should ever come upon us again and know, as an economy, what we can do to help prevent a financial crisis from becoming too dreadful. So will the Dodd Frank be able to stop the next crisis? My conclusion is that the Act has essentially given our economy a positive outlook on the future.