Banks are generally more responsive to crisis and what happened to many banks during the financial crisis in America, is evident and could continue for long time. There are many regulations to streamline the banking industry. In US, The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed mainly to cater for banks. The Act, is there, regardless of opposition from bankers and others. However, later on the Congress passed new law reinstating some of its restrictions.
The main purposes of Dodd-Frank Act include, financial stability by establishing the Financial Stability Oversight Council and the Orderly Liquidation Authority to monitor the financial stability of banks. Also, provides for liquidations or restructurings by the Orderly Liquidation Fund to assist in dismantling banks placed in receivership to prevent tax money to be used in helping such banks. The council has the authority to break up banks that are considered too large to pose risks.
The Consumer Financial Protection Bureau, established under Dodd-Frank, for preventing predatory mortgage lending and make it easier to understand mortgages before agreeing. It also governs other types of consumer lending, including credit and debit cards, and addresses consumer complains.
Another component of Dodd-Frank, comes in the Volcker Rule, which restricts how banks can invest, limiting speculative trading and eliminating proprietary trading. Banks are not allowed to be involved with hedge funds or private equity firms, which are risky. To minimize possible conflicts of interest, financial firms are not allowed to trade proprietarily without sufficient justification. Volcker Rule is similar to the Glass – Steagall Act, which recognized the dangers of banks extending commercial and investment banking services at the same time, i.e. deregulation policy. The act also contains a provision for regulating derivatives, such as the credit default swaps that were blamed for contributing to the financial crisis. Dodd-Frank set up centralized exchanges for swaps trading to reduce the possibility of counterparty default and required greater disclosure of swaps trading information to increase transparency in those markets. The Volcker Rule also regulates use of derivatives in an attempt to prevent “too big to fail” institutions from taking large risks. Moreover, because credit rating agencies were accused of contributing to the financial crisis by giving misleading favorable investment ratings, Dodd-Frank established the SEC Office of Credit Ratings. The office is to ensure that agencies provide meaningful and reliable credit ratings. Also, Dodd-Frank strengthened and expanded the whistleblower program promulgated by the Sarbanes-Oxley Act.
The question here, are stringent regulations effective? Are there no draw backs for tough regulations? By all means, tough regulations could bring negative effects more than positive. A wise balance is always required particularly in the volatile sensitive banking industry.
Dr. AbdelGadir Warsama
LEGAL COUNSEL
Email: AWARSAMA@WARSAMALC.COM
