Question

Speed-read the Dodd-Frank Wall Street Reform and Consumer Protection Act (2010). Do you think it will prevent a financial crisis like the one in 2007-08? What does consumer protection have to do with that crisis? What happened to banks that were allegedly "too big to fail?" Does it affect large banks and small community banks the same way? Who bears the costs? Make your case for over- or right-sized regulation.

Answer 1

Dodd-Frank WallStreet Reform and Consumer Protection Act (2010) :

• The Dodd-frank act came into consideration as a response to the great depression, 2008 Sub-prime crisis.
• Signed into federal law by Barack obama , with a lot of fiancial reforms and regulations after the failure of Financial system during great depression followed by 2008 crisis.
• To bring significant changes in the federal financial regulatory agencies and every other financial services industry of the country.

The changes and regulations brought up by the dodd frank act would prevent a crisis like that of 2008 to happen again as the major goals and objectives that are to be taken care of this act are:

• To promote the financial stability of the US by improving accountability and transparency in the financial system.
• To make an end of "too big to fail"
• To protect the US taxpayers by ending bailout.
• To protect people from Financial services which have hidden intent and abusive.

The significant changes that are brought :

• To streamline the regulatory process, the aim is to create host of new agencies (with the help or mergers and removals)
• Institutations which poses systematic risks need to be oversaught increasingly.
• Amending,changing and improving transparency in federal reserve act .
• The act emphasize on rigourous standards and supervisions to protect the economy and American consumers.

With Volker Act (Part of Dodd frank Act ) in practice, the banks are suppose to limit speculaative trading and eliminate proprietary trading thus making it difficult for the banks to be profitable.

It also regulates financial firms use of derivatives to restrict banks from taking larger risks which might wreak havoc in the financial system. IT also contains provsion in regulating credit default swap which was the major cause of 2008 sub prime crisis.

However, the community banks are at a loss because of the act as the regulations would be too stringent for them.The limited capacity would make take them out of the standardized financial modelling , might face a surge in the operational cost, unclear consequences, hampered potential growth and a reduction in the net income etc.

The difficulties are enormous for small banks which had little to do with the sub prime crisis or great depression.