Chapter EMA, Problem 6DS

To determine

To state: The regulatory changes in the recovery since the financial crisis 2008 along with its impact.

Explanation of Solution

The 2008 financial crisis highlighted the importance of financial markets and the need to ensure a well-functioning financial system. In 2010, the Consumer Protection Act and the Wall Street Reform known as the D-F Act were enacted to overhaul financial regulation in the aftermath of the crisis. The D-F Act contains four main elements:

1. Consumer protection

2. Derivatives regulation

3. Shadow bank regulation

4. Resolution authority over nonbank financial institutions.

In the event of future financial crises, the shadow bank regulation and resolution authority can extend government control to cover non-bank financial institutions. The D-F Act gives a special panel the capability to elect financial institutions that have the potential to generate a banking crisis. These designated shadow banks are then subject to bank-like regulation. In addition, the government now has the authority to snatch control of financial institutions that want a bailout during a crisis, the way it already did with commercial banks. This power, called resolution authority, allows the government to guarantee a wide range of financial institution debts in a crisis. In May 2018, Congress passed a bill to roll back rules enacted as part of the D-F law to prevent another financial crisis. The new bill leaves fewer than ten large banks subject to the strict requirements of the original law while exempting small and medium-sized banks from the regulations. Going forward, financial regulation faces several challenges. First of all, the idea that a financial institution can be “too big to fail” is still prevalent and the problem of moral hazard still exists. And, while new regulation has been put in place in the United States, it is not clear how these regulations can or will be applied in other countries. The 2008 financial crisis highlighted the global nature of financial markets and the worldwide linkages that must be acknowledged in order for regulation to be effective.

Finally, a regulation that addresses what happened in 2008 may not be effective in addressing financial crises in the future. World economies and world financial markets are ever-changing; regulation must be dynamic and able to respond to the current situation, not merely the most recent crisis.

Economics Concept Introduction

Introduction:

Financial crisis: is often regarded as a mixture of events, including considerable changes in asset prices and credit volume, severe disturbances in financial intermediation, large-scale balance sheet difficulties, especially the supply of external financing, and the requirement for large-scale government help.