Question

Explain the relevance of the Dodd Frank Act and the BASEL Agreements to US banks who conduct business on a global basis.

Answer 1

Dodd Frank Act: This law was passed with the intention to protect the consumers of financial institutions and regulate the securities market .This law was passed after the recession of 2008 with the aim to protect too big to fall banks. This also made a clear demarcation between the activities of commercial banks and investment banks. It sought to regulate the mortgage and CDS market which were responsible for the recession in 2008. This act limited the ability of US banks to compete with foreign banks who also engaged in investment banking activities. This because they could lend more and offer  competitive interest rate to gain more customers.

BASEL norms have recommended a fixed capital to be secured for risk weighted assets so as to absorb unexpected losses. In some case banks fail to maintain the same and that leaves them vulnerable to economic downturn .Bank adjust capital ratio based on Basel Norms where they maintain Tier 1 capital at minimum 6%.
Banks gives loans to different sectors and allocates risk weights to it. Banks have to keep 6% of these risk weighted assets. This insulates the banks during recession or financial stress. It is the core equity level which banks have to maintain. Basel agreement limited US banks to limit their risk exposure and they could provide less loans to customers. This has the potential to shrink their business . However Basel norms are applicable to all banks in the world. By maintaining tier 1 and tier 2 capital with them minimises the global exposure of US banks.a