Secondly, segregated operation could provide safety to both commercial banks and customers, and prevent commercial banks from misappropriating too much funds on high-risk activities.
Volcker rule could also make financial markets operate more stably.
4. The Controversies of Volcker Rule
With regard to the Volcker Rule, there are definitely a lot of arguments about its limitations and shortages, which are represented in four aspects: 1) the limitations of the rule; 2) the discussions on supervision aspect; 3) the rebounds from the industry; 4) the barriers in practicing the rule.
4.1 The limitations of the Volcker Rule
4.1.1 The Difficulty in Delimitate Proprietary Trading and Principal Trading
Volcker Rule is mainly focusing on forbidding the proprietary trading in commercial banks that requires the banks to set a clear boundary between proprietary trading and principal trading. However, in the process of actual bank trading transactions, there is no clear boundary between the two types of trading, which means it is impossible to completely differentiate the proprietary trading and principal trading. The US financial stability oversight committee (FSOC) in a recent report admitting that the supervision department has to "tightrope walking" to complete the rule, the supervision regulators must delimitate the principal trading that the commercial banks can do from the forbidden proprietary trading. If they define the proprietary trading too narrowly, it would impact the functions of the rule; if they define the proprietary trading too widely, it would harm the financial market. In reality, the banks as the market makers, they buy stocks from the customers, and then sell the stocks at a right time. However, it may take a very lo...
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...Banking Association)'s commitment for the draft rule, the banks would spend almost 6.6 million hours to execute the reports, whereby more than 1.8 million hours persistence is needed every year. That is to say, it needs one employee to work 3292 years, or for more than 3,000 bank employees to only work on the reports for one year.
The new Volcker Rule forbids the proprietary trading and limits the proportion of the hedge fund and private equity fund to no more than 3% for the banks, thus the banks worry about the Volcker rule will lead them to spend 10 million dollars to market making, insurance and risk hedging.
The cost for macroscopic scale is the reduction of market liquidity, thus have negative impact on economic recovery. What is more, the execution of Volcker Rule makes the American bank industry in a weak position compared to the international bank industry.
In addition, the Federal Reserve did badly on supervision of the financial market. Many banks did not have enough ability to value their risk. The Federal Reserve and other supervision institution should require these banks to enhance their ability of risk valuing.
Milton issued such a restrictive standard that the business needs of the company were not being met. The machines were breaking down and customers experienced delays in receiving their product. The adherence to a strict rule blinded the company to ongoing operational needs.
Since they are financial legislation, Sarbanes-Oxley Act and Dodd-Frank Act have strong relationship with the modern financial markets. This relationship is mainly attributed to the implications that the acts have on market participants, regulators, investors, and markets in general. These acts primarily focus on promoting the health and vitality of financial markets by addressing several practices that could have considerable negative effects on market participants and the economy in general. Actually, Dodd-Frank, which is arguably the most important financial legislation in modern economy, brought significant changes that contributed to changes in th...
First, Andrew Jackson, aimed towards all of the strict constructionists, brought up the point that the formation of a national bank is not in the Constitution, and therefore there is no reason why we should be able to use it. President Jackson also said how the national bank is “rebellious of the rights of the states, and dangerous to the liberties of the people”. Jackson could see that the bank was a monopoly, and the danger that this could bring. He said how the bank is run primarily by 25 people, 20 of which are elected by the bank stock holders, the other five are elected by the bank officials themselves, who in the long run can keep reelecting themselves, and corruption is bound to follow.
Presently after the accident certain change demonstrations must be set up to again settle the business sector. One of the strides that was taken was the setting up of the Securities and Exchange Commission or the SEC. The part of this establishment was to set out the business sector administers and rebuff if there should be an occurrence of any infringement of the laws. An Act called the Glass-Stegall Act was passed. This demonstration told that the business and the venture banks could no more have any relationship between them. In any case, as the time passed the government guidelines and the Glass-Stegall standard have changed all things considered. The other change that was presented was the foundation of the Federal store Insurance Corporation or the FDIC. This was intended to see that every single individual ledger was guaranteed up to $100000. (The 1929
After the crash reform acts were put into place to once more stabilize the market. The first step was the formation of the Securities and Exchange Commission or the SEC. The role of the SEC was to lay down the market regulations and enact discipline in case of any infringement of said rules. Secondly the Glass-Stegall Act was passed. The Glass-Stegall Act states that the investment and the commercial banks could no longer have any involvement.
Globally, banks have been facing big challenges in the last few years and continue to do so. As a result of the financial crisis, the regulators have tightened the minimum capital requirements with the aims to create a more solid and shock-resistant banking system especially for the so called Global Systemically Important Banks (G-SIBs). The Financial Stability Board is expecting to raise the total loss-absorbing capacity
...conomic recession we can conclude that we learn very less from history. The same uncontrolled and market that resulted in the destitution of the 1930’s still caused the economy at large to claps for families to loose there savings, houses, and jobs. President Roosevelt took one of the great dissensions of the depression era when he announce the Emergency Banking Act and the Glass-Steagall Act which banded the involvement of banks in the stoke market (foner, 800). By taking such action Government was able to stabilize the financial system. But today politicians choose to ignore this great historic lesson that could have saved us from the national disaster that is still affecting many households. If they still are refusing to put a tougher control measure in place to control the banking system, we could end up in a worst situation than even what we have seen in 2008.
As can be seen, the fear of centralization by state banks, and the long-standing opposition to federalization had a vastly detrimental effect on the American Economy. It leads to instability, inflation, banking panics, and near bankruptcy for the government on numerous occasions. The unique system that the United States have today is a balance between centralization and local control. This came from the early attempts at organization that were the First and Second Banks of the United States and the forces that destroyed them. This all lead to the balance in the system that can be seen today.
Overall responsibility for regulation of financial markets lies with HM Treasury and is then divided up between the Bank of England and the FSA. Now, the Bank of England’s remit is the operation of monetary policy and ensuring the stability of the financial system. The FSA has five primary functions: Authorisation of market participants; Prudential supervision of banks, insurance companies, securities firms and fund managers, and regulation of their conduct of business; Investigation, enforcement and discipline; Regulation of investment exchanges and clearing houses; Regulation of collective investment schemes. The change has been a move away from largely self-regulation to a combination of self-regulation and government interventionist regulation. Before 1997 the UK relied ‘primarily on private regulation (by the stock exchange and, to an increasing extent, by the institutes of chartered accountants).’ (Benston, 1985). The regulation of the financial system in the UK however is not as explicit as the system in the US where the Securities and Exchange Commission holds some of the most extensive regulations, which are viewed by some as being excessive.
In previous years the big financial institutions that are “too big to fail” have come to realize that they can “cheat” the system and make big money on it by making poor decisions and knowing that they will be bailed out without having any responsibly for their actions. And when they do it they also escape jail time for such action because of the fear that if a criminal case was filed against any one of the so called “too big to fail” financial institutions it...
But since the latter part of the 1960’s, stricter enforcement of insider trading practices has been put into place because of financial scandals. The first to be discussed is a concrete definition of “insider trading” as it is discussed in this essay. According to the “European Communities 1989 Insider Dealing Directive”, insider trading is the dealing on the basis of materials, unpublished, price-sensitive information possessed as a result of one’s employment. (Insider Trading)” Ivan Boesky pleaded guilty to the biggest insider-trading scheme discovered by the United States Securities and Exchange Commission (SEC). He made $200 million by profiting from stock-price volatility in corporate mergers.
If financial markets are instable, it will lead to sharp contraction of economic activity. For example, in this most recent financial crisis, a deterioration in financial institutions’ balance sheets, along with asset price decline and interest rate hikes increased market uncertainty thus, worsening what is called ‘adverse selection and moral hazard’. This is a serious dilemma created before business transactions occur which information is misleading and promotes doing business with the ‘most undesirable’ clients by a financial institution. In turn, these ‘most undesirable’ clients later engage in undesirable behavior. All of this leads to a decline in economic activity, more adverse selection and moral hazards, a banking crisis and further declining in economic activity. Ultimately, the banking crisis came and unanticipated price level increases and even further declines in economic activity.
During the 1920s, approximately 20 million Americans took advantage of post-war prosperity by purchasing shares of stock in various securities exchanges. When the stock market crashed in 1929, the fortunes of many investors were lost. In addition, banks lost great sums of money in the Crash because they had invested heavily in the markets. When people feared their banks might not be able to pay back the money that depositors had in their accounts, a “run” on the banking system caused many bank failures. After the crash, public confidence in the market and the economy fell sharply. In response, Congress held hearings to identify the problems and look for solutions; the answer was found in the new SEC. The Commission was established in 1934 to enforce new securities laws that were passed with the Securities Act of 1933 and the Securities Exchange Act of 1934. The two new laws stated that “Companies publicly offering securities must tell the public the truth about their businesses, the securities they are selling and the risks involved in the investing.” Secondly, “People who sell and trade securities must treat investors fairly and honestly, putting investors’ interests first.”2
The large banking businesses are in many ways at blame for the current recession. They lobbied for, and got, the relaxation of rules limiting how much debt they could have. By going into greater debt, they could increase their profits. However, this also greatly increases their risks. When the economy began to decline, these companies suddenly were not able to pay back their debts, which made a huge impact upon the economy. This trickled down throughout the entire economy, which relies upon loans and investments to keep working. The government had to step in and passed a “bailout” for these large companies in order to keep the economy from getting worse, but the damage was already done (Labaton).