What Innovations Are Banks Using To Circumvent Dodd-Frank?
The Dodd-Frank Act is a new regulation enacted with an aim of creating a sound economic foundation facilitating job creation, consumer protection, instilling discipline in Wall Street and other Big Bonuses, bringing to an end bailouts as well as big failures and preventing any other financial crisis from occurring in the future. There is no doubt that the 2008 financial crisis ever since the 1930’s great depression was brought about by decades of lack of accountability in the big banks and Wall Street. The outcome was a loss of 8 million jobs, dip in housing prices, wiping out of personal savings and widespread business failure. Consequently, the causes of the 2008 financial crisis require a serious action to prevent any other such occurrence in the future. This requires a restoration of accountability and responsibility in the financial system to ensure Americans have confidence with the system that aims at protecting and working for them.
The Dodd-Frank legislation has created a Consumer Protections with authority and Independence. This is to act as a watchdog to protect American consumers in terms of financial information. The legislation aims to end big bailouts. This is enhanced by the creation of better ways of liquidating failed financial institutions, imposition of undesirable leverage and capital requirements to prevent empire building, establishment of supervision and standards as well as requirement for regular updates on all occurrences. The legislation also has created a council to provide advance warnings to American consumers. Additionally, it has become mandatory for firms to be transparent and accountable on exotic financial instruments. Similarly, shareholders now have a say on corporate governance and executive pay. Moreover, the legislation aims at protecting American investors and enforcing regulations on financial information provided by financial firms.
In spite of the good intentions of the Dodd-Frank legislation, financial institutions are making frantic efforts towards circumventing them. Indeed, banks have now managed to create a loophole through which to dodge the legislation. Currently, some of the big banks in America are colluding with clients to circumvent the Dodd-Frank laws. The banks are allowing traders to convert risky securities to high-grade bonds required by clearinghouses to be posted as collateral. This is facilitated through temporary swapping out of securities of lower-grade into high-grade bonds like treasuries presently in high demand by banks and investors shoring up their books. The collusion is beneficial as it gives traders preferred quality collateral while banks make money through interest and fees. Banks dislike the new provisions of borrowing high-grade bonds because there is a possibility of a domino effect in the market in case the original lender calls back the collateral.
Experts are concerned with the loopholes created by the legislations. The new law has brought about too many exemptions thus excluding retail transactions as well as trades by small banks, non-financial firms and insurance. Experts warn of a possibility of the exempted trades meant to restore legitimate practices may morph into very complex and highly risky financial products.
Weise, K. (2012). A $4 Trillion Dodd-Frank Loophole.
- Describe the steps being taken by the banks to circumvent the new law or regulation. Why do the banks dislike the new or regulation?
- Summarize and expert commentary on what effect the banks’ efforts may have on the financial system.