Dodd-FrankIn 2010, the U.S. finally agreed it needed bank reform. It sets up a Consumer Financial Protection Agency to be under the Federal Reserve. It gives regulators the authority to split up large banks so they don't become "too big to fail." It eliminates loopholes for hedge funds, derivatives and mortgage brokers. Known as the "Volcker Rule," it bans Wall Street banks from owning hedge funds. It gives states the right to regulate banks, overriding Federal regulations if needed to protect the public. It also suggests an independent agency that has the authority to review systematic risks that would affect the entire financial industry. It reduces executive pay by allowing shareholders a non-binding vote. For more, see Dodd-Frank Wall Street Reform Act.
Financial Regulations Proposed in 2009
The Consumer Financial Protection Agency was originally proposed in 2009. Banks lobbied against it, but may be mollified if it is under the Fed. The other proposals from 2009 are still in limbo:
- Bank regulations would be consolidated under a new National Bank Supervisor.
- Banks would have to increase their capital cushion.
- Issuers of products sold on the secondary market would have to keep at least 5% of the value of their products sold. They would have new reporting requirements, as well.
- Credit rating agencies, such as Standard & Poor's and Moody's, would face regulations designed to reduce conflict of interest.
Obama Pledged to Increase Financial Regulations
Obama promised tougher regulations on insider trading in his economic campaign platform. He wanted to streamline regulatory agencies, especially those that oversee banks that borrow from the government, establish a financial market advisory group, improve transparency for financial disclosure, and crack down on trading activities that could manipulate markets. These are also in limbo.
Once elected, Obama put together an economic team that is in favor of more federal regulations. Obama appointed Former Federal Reserve Chairman Paul Volcker to head his Economic Recovery Advisory Panel. Volcker blamed the economic crisis on poor regulation of the financial sector, and is a well-known advocate of tougher restrictions.
The Securities and Exchange Commission (SEC) is at the center of Federal financial regulations. President Obama signaled his intent to increase regulation by appointing Mary Schapiro as the chair. One of the first things she did was to increase the regulations on the SEC itself.
The Federal Reserve took more control of companies, like AIG, that were too big to fail. The FDIC is in charge of winding down commercial banks before they go bankrupt. However, these existing agencies don't cover hedge funds and mortgage brokers.