Execution of the Dodd-Frank Act and consequences for the prospect of US Financial markets
A meeting that happened in the White House in the beginning of March, could have serious consequences for the prospect of the US financial sector. Even if regulators function on their own, various principal federal financial regulators were beckoned sometime in March to the White House regarding the implementation of the Dodd-Frank Act.
The meeting that took place in March must be looked upon as a sign of caution to the financial sector that it would have to face severe new regulatory challenges before the term of Obama comes to an end. Prior to the meeting with the President, the Fed strategized the plan for stringent new regulations on the banks, proposing to restrict the interbank lending to 15% of capital.
According to experts at Academy of Financial Trading, the Dodd-Frank Act would be utilized aggressively in the coming months to establish President Obama’s regulatory framework. This is only the starting point. There is a possibility that prudential regulation – regulators govern the credit distribution and risk-taking and enforce capital needs – would be prolonged to the other financial system.
In other words, under the pretext of crafting “stability”, a practical regulatory system would substitute the existing unrestrained financial market with a regulator controlled market in which risk-taking is managed by the government. This is not an over imaginary concept. The treasury, as well as the Fed are members of the Financial Stability Board (FSB), a group of finance ministers and central bankers, based in Europe, authorized by G-20 leaders in 2009 to restructure the global financial system.
For a long time, the Board has been creating concepts for imposing practical regulation on “shadow banks” – a term used to elucidate and regulate financial institutions that are not prone to bank-like regulation which includes various stakeholders - broker-dealers, asset managers, mutual funds, hedge funds and insurance companies, among others.
According to Mark Carney, FSB board chairman, “The FSB’s priorities for 2016 will be the full and consistent implementation of post crisis reforms, which include the prudential regulation of shadow banks. Although large financial firms — such as broker-dealers, insurers and money managers of all kinds — have received most of the attention as shadow banks, the FSB has made clear that small firms will not escape prudential regulation. In the FSB’s definition, a firm is designated as a shadow bank if it participates in a complex chain of transactions, in which leverage and maturity transformation occur in stages.”
Usually, maturity transformation – the risky business of transforming short term deposits into long-term loans – relates to banks only. However, as elucidated by the Financial Stability Board, maturity transformation would impact financial firms of various sizes if they contribute to a wide array of transactions that would eventually alter a short-term loan into a long-term credit.
In the US, the Financial Stability Oversight Council would implement the Board’s reforms.