Question

Define each of the following terms

- Too big to fail (TBTF) Redlining

- Dodd – Frank Wall Street Reform and Consumer Protection Act of 2010

- Intellectual Capture

Answer 1

Q1. TOO BIG TO FAIL:

Too big to fail, a concept whereby a business has become so large that a government will provide assistance to prevent its failure because not doing so would have a disastrous ripple effect throughout the economy. If a large company fails, companies that rely on it for portions of their income might also be extinguished along with the employment they provide. Therefore, if the cost of a bailout is less than the cost of the failure to the economy, a government may decide a bailout.

Ex. Banks are so vital to the economy that it would be disastrous to the economy if the banks went bankrupt and thus the government would provide a bailout to the bank.

Q2. Dodd – Frank Wall Street Reform and Consumer Protection Act of 2010

• The Dodd-Frank Wall Street Reform and Consumer Protection Act is a financial reform legislation passed by the Obama administration in 2010 as a response to the financial crisis of 2008. This is named after sponsors U.S. Senator Christopher J. Dodd and U.S. Representative Barney Frank
• The intention of the act was to decrease various risks in the U.S. financial system.
• A key component of Dodd-Frank,( the Volcker Rule), restricts the ways banks can invest, limiting speculative trading and eliminating proprietary trading. . Thus, The Act effectively separates the investment and commercial functions of a bank.
• Banks are not allowed to be involved with hedge funds or private equity firms, as these kinds of businesses are considered too risky.
• The act also contains a provision for regulating derivatives such as the credit default swaps that were widely blamed for contributing to the 2008 financial crisis
• Dodd-Frank also established the SEC Office of Credit Ratings, since credit rating agencies were accused of giving misleadingly favorable investment ratings that contributed to the financial crisis. The office is tasked with ensuring that agencies improve their accuracy and provide meaningful and reliable credit ratings of the businesses, municipalities and other entities they evaluate