3. Pros for the Volcker rule
The core idea of Volcker rule is to make banks in the U.S change mixed management to segregate management, in other words, Volcker rule tends to separate commercial banks and investment banks. This may bring harm to some people’s benefits; especially the beneficiary in Wall Street, but some people can still get benefits from Volcker rule and support this in different ways.
3.1 Government and Taxpayers
In a country with excellent risk management, mixed operation could bring improvement to the whole financial industry; conversely, if a country’s risk management may not perform very well; mixed operation may bring chaos to this country’s financial sector. What is worse, it may bring much harm to the country and even the world’s economy.
Before financial crisis in 2008, speculators including investment banks in Wall Street securitized mortgages by using OBS (Off-balance-sheet Operation), and used CDS (Credit Default Swap) to hedge funds. Finally, financial risk exposed, which caused heavy loss to the whole economy in U.S. The key reason that it is harmful is not only that commercial banks engage in investment banks’ activities, it is because commercial banks, by engaging in securities organization, misappropriated credit funds and inter-bank borrowing(lending) business for their own investment, including in security market or real estate market. This would create a “bubble” economy and if the “bubble” is broken, the whole country’s economy will seriously suffer from it. To avoid that, the government has to stop it. So the government has to put taxpayers’ money to cover this big hole caused by speculators in Wall Street.
Now Volcker rule prohibits that banks should not engage in proprietary trading, whic...
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...00 and those non-bank financial institutions (shadow banks) may have higher capital requirements and would face strict banking regulations. Higher capital requirements and lower leverage mean that revenue of these activities banned by Volcker rule is going to decrease. That is why some banks support to Volcker rule’s efforts and they are willing to spin off proprietary trading and hedge funds. If they do not do that, they will face steep of revenue anyway and may be regulated in a more strict way.
Volcker rule could also bring some benefits to banks.
First, Splitting commercial banks and investment banks could train two employees in two lines, whether professional techniques or professional management skills. Because in securities areas, employees could increase their professional technology and services by performing customers’ requirements, while commercial banks,
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.
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.
The presence of systemic risk in the current United States financial system is undeniable. Systemic risks exist when the failure of one firm may topple others and destabilize the entire financial system. The firm is then "too big to fail," or perhaps more precisely, "too interconnected to fail.” The Federal Stability Oversight Council is charged with identifying systemic risks and gaps in regulation, making recommendations to regulators to address threats to financial stability, and promoting market discipline by eliminating the expectation that the US federal government will come to the assistance of firms in financial distress. Systemic risks can come through multiple forms, including counterparty risk on other financial ...
That said the overarching objective of the act continues to be to reduce risk in the financial industry, and subsequently reduce the risk posed by “too big to fail” institutions to the rest of the economy. This focus will be the key provisions of the Act, the reasoning behind said provisions, their implementation, and the subsequent impact on the industry. In order to analyze the direct effects Dodd-Frank had on the industry, Goldman Sachs will be used as an illustration of the industry before and after Dodd-Frank. The key provisions in focus are: Systemic risk regulation, The Volcker Rule, Regulation of financial instruments (Securitization and
Since 1933 there has been numerous proceedings of regulation of banks. Regulations as the Glass-Steagall Act, which is the separates of commercial and investment banking. FDIC insurance, which protects depositors from losing their money. Tougher SEC regulations that allow you to invest on Wall Street without being cheated. As a result, for almost 50 years, there was no banks that failed, no major crises and the economy recovered from the Great Depression. Several economists believed that trend would have continued if not for deregulation. Although, deregulation somewhat increases the economy, it also causes unsustainable bubbles, increase riskiness in banks, and if things turn for the worst (like 2008), the banks are bailed out, and we the
This reform re-regulated the financial sector, tightened capital requirements on banks and overall placed major regulations on the financial industry. This reform also protects consumers with rules for abusive lending and mortgage practices. The main goal of the Wall Street Reform is to subject banks to a number of regulations and the possibility of being broken up due to the banks being “too big to
Major banks are cutting back on some of their legally permitted operations, such as- market making, and that has led to liquidity issues in the bond markets. Proprietary trading could become unregulated if more banking activities continue moving towards the shadow banking system. This would essentially defeat one of the main purposes of Volcker Rule. [d] The third major unintended consequence has been the degree by which the Federal Reserve has become the main regulator of the finance industry. In order to discourage future bailouts similar to the ones during the financial crisis, the Dodd-Frank Act limited the Fed’s emergency powers. However the liquidity and capital standards now imposed by Fed has purportedly become one of the most important regulatory developments of the Dodd-Frank Act.
The Federal Reserve board made up of appointed governors is basically in charge of making sure that the valves and pressure is relieved or tightened as needed in order to make sure that the economy continues to function. The primary purpose of the Fed is to oversee the structure and security of the commercial banking system. Most important responsibility that the Fed has is to make sure that the fifty banks that hold approximately a third of the nation’s bank deposits positive is kept secure (Grieder, 1989). The shifts that are created by the Fed in terms of the money supply changes the way in which banks respond to their consumers, which creates a great deal of responsibility and power in this one social
The "subprime crises" was one of the most significant financial events since the Great Depression and definitely left a mark upon the country as we remain upon a steady path towards recovering fully. The financial crisis of 2008, became a defining moment within the infrastructure of the US financial system and its need for restructuring. One of the main moments that alerted the global economy of our declining state was the bankruptcy of Lehman Brothers on Sunday, September 14, 2008 and after this the economy began spreading as companies and individuals were struggling to find a way around this crisis. (Murphy, 2008) The US banking sector was first hit with a crisis amongst liquidity and declining world stock markets as well. The subprime mortgage crisis was characterized by a decrease within the housing market due to excessive individuals and corporate debt along with risky lending and borrowing practices. Over time, the market apparently began displaying more weaknesses as the global financial system was being affected. With this being said, this brings into question about who is actually to assume blame for this financial fiasco. It is extremely hard to just assign blame to one individual party as there were many different factors at work here. This paper will analyze how the stakeholders created a financial disaster and did nothing to prevent it as the credit rating agencies created an amount of turmoil due to their unethical decisions and costly mistakes.
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...
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.
Investment bankers perform a wide range of finance-oriented functions. They control the issuance of stock and oversee its sale to the public. They analyze the probability of success of a single stock, or a whole area of public companies. They also recommend and execute merger strategies, as well as the buy and sell bonds. Because of such a wide range of tasks, investment bankers should not limit their education to a single major of study.
In 2008, the world experienced a tremendous financial crisis which is rooted from the U.S housing market. Moreover, it is considered by many economists as one of the worst recessions since the Great Depression in 1930s. After bringing a huge effect on the U.S economy, the financial crisis expanded to Europe and the rest of the world. It ruined economies, crumble financial corporations and impoverished individual lives. For example, the financial crisis has resulted in the collapse of massive financial institutions such as Fannie Mae, Freddie Mac, Lehman Brothers and AIG. These collapses not only influenced own countries but also international scale. Hence, the intervention of governments by changing and expanding the monetary and fiscal policy or giving bailout is needed in order to eliminate and control enormous effects of the financial crisis.
This is followed in section 5 by an analysis of the recent changes in the banking industry. With the development of the financial system, declining entry barriers and the deregulation of the banking industry make banks no longer the monopoly suppliers of banking services and reduce their comparative advantages which they usually hold in the past. Whether the reasons give rise to the existence of banks are still powerful will be examined here, while section 6 offers a way of considering whether banks are declining by looking at the value added by the banks. When the value added by banks is examined, banks are not a financial intermediation, which not only conduct the traditional services but also provide more diversified
A variety of groups are concerned in bank profitability for various reasons. The bank shareholders would want to know if the value of their investments is high or low. The investors also use current and past performance to predict future price of the banks’ shares traded on the stock exchanged. The management of the bank as trustee of the shareholders is evaluated and compensated on the basis of how well their decisions and planning have contributed to growth in assets and profits of their banks. Employees of bank also are concerned with profits, since their salaries and promotions are frequently tied to the profitability performance of their banks. Depositors use bank performance and profitability as indicators of security for their deposits in the banks. Finally, business community and general public are concerned about their banks’ performance to the extent that their economic prosperity is linked to the success or failure of their banks.