Arguments for and Against Complex Regulation in Banking Essay

On June 16, 1933, President Roosevelt signed into law the widely debated Glass-Steagall Banking Act. Sponsored by Virginia’s U.S. Senator Carter Glass and Alabama’s U.S. Representative Henry Steagall, the Glass-Steagall Banking Act was one of the attempts to restore the American people’s confidence in the banking system. Congress knew the current banking system needed reform. They desired to restrict the use of bank credit for speculation and instead direct bank credit to more productive uses, such as agriculture, commerce, and industry.

There are various categories of banking; these include retail banking, directly dealing with small businesses and persons. Commercial and Corporate banking which offers services to medium and large businesses (Koch & MacDonald 2010). Private banking, deals with individuals, offering them one on one service. The last category is investment banking. These help clients to raise capital and often invest in financial markets. Most global banking institutions provide all these services combined. With all these institutions in existence within the same localities and offering similar services, there is a need to regulate the industry so as to protect the consumer and provide fair working environment for all banks (Du & Girma, 2011).

The general objective of this policy paper is to deeply understand the latest and most influential financial reforms and the current financial environment in U.S through relatively comprehensive analysis with regard to the Dodd-Frank Act. In doing so, I move forward to provide some suggestions on improving the relevant legislature.

During the 1930s, the most prominent reason for U.S. banking regulation was to prevent bank panics and more economic disaster like those that had been experienced during the Great Depression. Later deregulation and financial innovation in industrialized countries during the 1980s eroded banks monopoly power, thus weakening their banking systems and seeming to embody the fears of post-Depression policy makers who instituted regulation in the first place. Fear that individual bank failures could spread across international borders creates pressure to harmonize bank regulation worldwide. One advocate suggests that universal banking, at least for industrialized countries with internationally active banks, would “level the playing field” by eliminating competitive advantages created by government subsidies. Although this is a valid point, one of the major driving forces behind the globalization of the banking world is the ability of banks to take

1. The elimination of potential regulatory gap or overlaps arising from member regulation and market regulation

In simple terms, Dodd-Frank is a law that places major regulations on the financial industry. It grew out of the Great Recession with the intention of preventing another collapse of a major financial institution like Lehman Brothers. Dodd-Frank is also geared toward protecting consumers with rules like keeping borrowers from abusive lending and mortgage practices by banks. It became the law of the land in 2010 and was named after Senator Christopher J. Dodd (D-CT) and U.S. Representative Barney Frank (D-MA), who were the sponsors of the legislation. But not all of the provisions are in place and some rules are subject to change, as we'll see. The bill contains some 16 major areas of reform and contains hundreds of pages, but we will focus here on what are considered the major rules of regulation. One of the main goals of the Dodd-Frank act is to have banks subjected to a number of regulations along with the possibility of being broken up if any of them are determined to be “too big to fail.” To do that, the act created the Financial Stability Oversight Council (FSOC). It looks out for risks that affect the entire financial

The Glass-Steagall Act came into existence largely due to the stock market crash of 1929 and the Great Depression. The crash and its aftermath caused Americans to lose faith in the banking system. Glass-Steagall attempted to restore the public’s faith in banks by separating commercial banking from investment banking and providing insurance on bank deposits. The Act worked as intended but its effects slowly diminished over the next 67 years and deregulation in the banking industry culminated with the enactment of the Gramm-Leach-Bliley Act in 1999 by then President Bill Clinton.1 The GLBA gutted Glass-Steagall and ended restrictions on intermingling between commercial and investment banking.1 Many believe the GLBA was a major cause of the financial crisis that erupted in 2008.

The Dodd-Franck Act is one of the most comprehensive financial regulations of the last decades. Its main goal is to “solve” and prevent financial crisis in the U.S. Due to the characteristics and size of the Act, most scholars agree that the best course of action is to study and evaluate it in parts: The creation of the Consumer Financial Protection Bureau and its additional regulations.

While financial banks were inadequately controlled by regulatory agencies, there was a necessity for fresh policies to resolve these issues. Prior to the Volcker Rule becoming implemented, the crooked financial activity done at the time had affected the clients of the banks. The complexity of the regulations caused dissatisfaction for the clients and customers and eventually affected the overall business flow of the bank institutions. There was a strong need for new procedures and restrictions before the banking industry would have another breakdown and in the worst case, cause another financial crisis within the American economy. The biggest problem during this crucial financial time included how the banking industry was consistently earning large amount of money from these high-risk trades with the institution’s own

Financial Services Chairman Barney Frank and former Chairman of the Senate Banking Committee Chris Dodd created the Dodd-Frank Wall Street Reform and Consumer Protection Act comprised of “849 pages, 16 titles, and 225 new rules across 11 agencies” (Richardson 85). It is a heavily regulated complex act created to reign in risky behavior of Wall Street. Epstein and Montecino from Political Economy Research Institute state, Dodd Frank came about to “reign in risky practices, increase the capital and liquidity buffers banks had to hold, bring derivatives under-regulation…begin to bring the largest most complex financial institutions…under scrutiny and some regulatory oversight”(1). Dodd- Frank signed into federal law

The Dodd-Frank Act put a considerable burden on financial regulators whom have to work out the details in order to implement its vision. It includes a variety of points relating to the prevention of a future crisis (Kim & Muldoon 2015). Some of these major points include: (1) The creation of a new Financial Stability Oversight Council, comprising existing regulators, to be responsible for overseeing any financial institution or set of market circumstances determined to be likely to result in risk to the overall economy, (2) A reallocation of banking oversight responsibility among the Federal Reserve System, the Comptroller of the Currency, and the FDIC, requiring the Federal Reserve Board to supervise nonbank financial companies “that may

The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into federal law by President Obama on July 21, 2010 as a response to the financial crisis of 2007-08. From an economic standpoint the overall consensus leading to the financial crisis can be linked to not only greed, but to ‘excessive deregulation’ and the “finanicialization of everything” (Knight 2015). Supposedly, the failures were due to the financial sector being funded by debt, which already sounds unethical and a poorly planned system. Prior to Dodd-Frank legislation was the Banking Act of 1933, which had similar intentions of providing stability. However, the Act was eaten away over time and companies weren’t as strictly regulated (Acharya 2013).

The Dodd-Frank Act promotes a more rigorous and comprehensive regulatory framework for financial system, which deeply affects the development of both US and global financial institutions.

The reality of systemic risk made the task of regulating the financial system increasingly complicated, as the crises aren’t contained in one country or market. The extreme inter-dependence between the different agents is the main reason why we need regulation today, as some misconducts can cause a domino effect, affecting markets globally. The structure of the banking system in itself explains this process. In the finance industry, banks borrow money from other banks. If one bank fails, the one who lent the funds in the first place might also follow the same path, creating panic in the markets. The government’s first prerogative is to protect its citizens from these

The finance industry is primarily a service industry and therefore is there to serve people. The power taken and given to this industry does not represent a democracy. In 1982, even though it goes against the Glass-Steagall Act of 1933 (passed after the Great Depression in order to control banks and prohibit commercial banks from using depositor’s savings to invest in speculative instruments), the Reagan administration enabled the deregulation of the American financial market.