The Dodd-Frank Act got enacted into law in July 2010. The act is entirely known as Dodd-Frank Wall Street Reform and Consumer Protection Act (Act & Protection 2010). The act is of federal legislation in the United States of America that puts the financial industry regulations under the federal government control. The fundamental aim of the Act is to create accountability and transparency in the financial management sector as well as minimizing risk resulting from corruption and fraud. Besides, the goals of the Dodd-Frank Act was to place financial institution under a strict measure and regulation. This is as a result of the recession experienced in the late 2000s due to a high level of negligence and laxity by the large banks in the United States of America. As a remedy to the financial crisis and recession experienced in America, the Act created the Financial Stability Oversight Council (FSOC) (Act & Protection 2010). Financial Stability Oversight Council helped to solve the persistent crisis in the financial sector and reducing the probabilities of another recession in America.
The act was signed into law by President Barrack Obama on July 21st, 2010. The act was written after the major financial crisis experienced by the United States in 2008. The act has pioneered a complete change of the policies governing the financial sector. The primary role is to prevent possibilities in the financial crisis in future. In such a case, the federal government had a strategy of reducing cases of taxpayer-funded bailouts. Besides, the act aims at establishing better ways of protecting the consumers.
The Dodd-frank act had some players including; Security and Exchange Commission (SEC), the Commodities Futures Trading Commission (CFTC), the Consumer Financial Protection Bureau (CFPB) who developed hundreds of policies incorporated in the Act (Skeel, 2010). The policies contributed to the reduction of risky consequences characterized in the previous years in our financial system. The Dodd-frank act took faced different opinions in the light of the 2016 general election in America. The Democrats, headed by Hillary Clinton repeatedly argued on what need to be done to reduce the financial risk. Clinton proposed a targeted compilation of reforms with intentions of mitigating risks in the shadow banking sector (Act & Protection 2010). However, according to the Republicans, they argued that some policies that were alleged to hurting smaller banks and the entire economic freedom and vibrancy should be abolished. They proposed the re-introduction of Glass-Steagall and raising of the capital standard.
The Dodd-frank act has six major components that aim at changing the countrys financial system. The components include:
I. The Volcker Rule
II. The Consumer Financial Protection Bureau
III. The Financial Stability Oversight Council (FSOC) and designations
IV. Derivative Regulations
V. Too Big to Fail and Living Wills
VI. Capital and Liquidity Requirements
The Volcker Rule
The Volcker rule has a primary intention of monitoring and foreseeing that commercial banks don't engage in speculative and gambling business with the aim of raising their profit margin. Specifically, it limits the banks from investing in private equity funds. This policy was enacted after commercial banks in America engaged in proprietary trading resulting in the 2008 financial crisis. A massive loss was registered as a consequence of the bank's misconduct. The depositors funds and taxpayers dollars were put at risk. In such a case, the Volcker rule was brought in place to monitor the activities of the commercial banks thus keeping depositors finances safe. The Volcker Rule was finalized in April 2014, and the commercial banks were expected to comply with the rule by July 2015.
The Consumer Financial Protection Bureau (CFPB).
It was launched on 11th July 2011 as an independent financial regulator to monitor and control money markets. The body has a responsibility of foreseeing activities under mortgages, students loans, credit cards and capital markets (Skeel, 2010). In that regard, the body has powers to change policies, supervise financial companies directly and enforce laws protecting consumers by punishing the defaulters and taken other relevant actions to them. The body was created since no single monetary authority had a primary role in preventing violation of consumers rights or mischievous acts toward customers in the financial markets (Acharya et al., 2010). Besides, the CFPB plays a fundamental role in educating the consumers on financial issues and empowering them. They enable the consumers to be masters of their finances and help them understand their investment trajectories. Senator Elizabeth Warren developed the agency.
Capital and Liquidity Requirements
Before the financial crisis, most pf the huge financial institutions had a leverage ratio of approximately 50:1 (Skeel, 2010). That implies that in store one dollar in capital to match the 50 dollars they had in liabilities. By the time of financial crisis, the value of mortgage-related assets started declining. The firm's balance sheets were scraped off, and the Federal Reserve had no otherwise but to intervene and recapitalize the companies. In such a case, there was a need to develop a policy that would ensure that commercial banks remain afloat longer in case such a crisis happens again (Acharya et al., 2010. There would be no essence for government bailouts to rescue the firms. As a result, the Federal Reserve enacted new policies for the amount of capital dictating that financial institutions should hold up to 9.5% of their assets in liquid capital (Skeel, 2010). Liquid capital is those assets that can be easily converted into cash. This liquid capital included government bonds and other assets that were defined to having minimal risk profile. As a result of this rule, all large financial firms are expected to meet the new capital standards requirements by 2019. It implies that all large financial institutions will have a leverage ratio of 10:1.
The Financial Stability Oversight Council (FSOC) and designations.
The 2008 financial crisis showed that unmonitored non-banking institutions were adversely engaged in commercial activities that had high potential chances of placing the broader financial system at risk (Acharya et al. 2010). For instance, the multinational insurance firm AIG, requested for a $180 million taxpayer-funded bailout after it sold huge amounts of insurance in the absence of hedging its investments. Besides, the insurance company sold its credit default swaps without substantial capital stock. As a result, an FSOC body was created in the summer of 2013 with the aim of identifying and monitoring risks to the financial system. The body had a primary task of designating systematically important financial institutions.
The Dodd-frank act incorporated the derivatives rules after a large number of homeowners failed to pay their mortgages in 2008. All firms that were linked to the mortgages were wiped out due to bankruptcy. The Federal Reserve was forced to intervene and prevent outright fallout. The unregulated derivatives gave room for much risks that were solidly transferred throughout the entire financial system. The Dodd-Frank Act mandated the Security Exchange Commission and the Commodity Futures Trading Commission authority to control and monitor the over-the-counter derivative trading. Over-the-counter implies that commercial trade is negotiated and managed by the private sector rather than a formal exchange market like the New York Stock Exchange. The act also dictates that firms involved in derivatives exchange have to use clearing firms to carry out the operation. The clearing houses help to reduce overall risk by offering collateral deposits and overseeing the creditworthiness of the parties engaged in derivative business.
Too Big to fail and Living Wills.
The Dodd-frank Act issued an orderly liquidation authority to the Federal Deposit Insurance Corporation. As a result, large commercial banks are required to create living wills. This implied that the banks have to provide a detailed plan expounding on how they would mitigate their failure without negatively affecting the broader financial system. In a case where a bank fails to provide adequate plans, they could be instructed to break into smaller financial institutions. The policy is aimed at preventing financial disasters and ensuring that the government does not incur cost in bailout at a time that a large economic organization fails.
The state of the economy in the United States in the late 2000s was low, and the country experienced an economic crisis. The low economic state led to the president by then, Barrack Obama to pass a bill that that would help in the financial sector by reducing the risks to be inquired by the public investors and the banks. The Dodd-Frank Act which is fully known as the Dodd-Frank Wall Street Reform and Consumer Protection Act is a federal law in the United States that is responsible to the placing of regulations of the entire financial sector that is in the hands of the government ("Introduction to the Dodd-Frank Act," 2012,).
In July 2010, Barrack Obama signed the Dodd-Frank Act. The financial regulatory processes that were created by the law was of great use to the individuals in the financial industry of the nation. The implementation of the Act was essential so as to ensure the processes created helped in limiting the risk to be incurred by enforcing transparency and accountability in the system.
The senate house decided to name the Act after U.S Senator Christopher J Dodd and Representative Barney Frank ("Appendix A: Contents of the Dodd-Frank Act," 2012,). These two individuals played a significant role in coming up with the regulations in the Act that will enable the Act to achieve its desired goals in the financial sector of the country. The Dodd-Franck act had several goals that it intended to meet. The major purpose of the Act was to prevent another great recession like that experienced in the year 2008 which cause a widespread loss of money for many years in the economy of the country.
Furthermore, the act is also entitled to protect the consumers from the risky behavior, abuse or financial loss of financial institutions in the country. For the law to attain the goals, other monitoring bodies came up so as to ensure that the financial institutions are operating under the desired conditions reducing the level of risk to the entire financial industry of the country.
The Dodd-Frank Act had several sections with each dealing with solving the different sectors of the financial system in the country. The act included the following segments, first and foremost, the first section was to deal with the financial stability in the financial sector. This section has had the task of monitoring any systemic risk and also to research any of these risks in the economy of the state. For the section to do so, it formed two agencies that were responsible for the research. The agencies also had the responsibility of analyzing the overall supervision of the bank holding companies by the Federal Reserve. Furthermore, Act allows for the creation of two councils that work hand in hand in the monitoring of the Treasury Department. These councils were Financial Stability Oversight Council (FSOC) and the Office of Financial Research (OFR). Through the formation of the two boards, individual institutions classified as systematically important financial institution experienced imposition of stricter regulations in their running (Richardson, 2014). The move led to most institutions to be cautious in their mode of operation so that they may not end up categorized in this section of o...
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