From financial crisis to financial reforms? Implementation of the Dodd-Frank Act

From financial crisis to financial reforms? Perhaps the Federal Reserve of United States completed its cycle with the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act).

Chairman Ben S. Bernanke released its testimony on the Implementation of the Dodd-Frank Act.

The Bernank’s testimony says that

One of the Federal Reserve's most important Dodd-Frank implementation projects is to develop more-stringent prudential standards for all large banking organizations and nonbank firms designated by the council. Besides capital, liquidity, and resolution plans, these standards will include Federal Reserve- and firm-conducted stress tests, new counterparty credit limits, and risk-management requirements. We are working to produce a well-integrated set of rules that will significantly strengthen the prudential framework for large, complex financial firms and the financial system.

Good! This will put checks on their market participants’ risk taking measures and lending practices.

The testimony also says that

Complementing these efforts under Dodd-Frank, the Federal Reserve has been working for some time with other regulatory agencies and central banks around the world to design and implement a stronger set of prudential requirements for internationally active banking firms. These efforts resulted in the adoption in the summer of 2009 of more-stringent regulatory capital standards for trading activities and securitization exposures. And, of course, it also includes the agreements reached in the past couple of months on the major elements of the new Basel III prudential framework for globally active banks. Basel III should make the financial system more stable and reduce the likelihood of future financial crises by requiring these banks to hold more and better-quality capital and more-robust liquidity buffers. We are committed to adopting the Basel III framework in a timely manner.

It is good to know that the Federal Reserve has been serious in implementing Basel III framework for their banks. The good quality assets and high liquidity buffers by these banks will help in preventing the financial crisis further.

What the act says?

The nice brief summary of the Dodd-Frank Act compiled by United States Senate Committee on Banking, Housing and Urban Affairs is mentioned here. It aims to create a sound economic foundation to grow jobs, protect consumers, rein in wall street and big bonuses, end bailouts and too big to fail and most important, prevent another Financial Crisis.

In testimony words,

The act also requires supervisors to take a macro-prudential approach; that is, the Federal Reserve and other financial regulatory agencies are expected to supervise financial institutions and critical infrastructures with an eye toward not only the safety and soundness of each individual firm, but also taking into account risks to overall financial stability.

To conclude, the Dodd-Frank Act is a major step forward for financial regulation in the United States which may provide a starting step for others to follow.

Happy Reading!

-       Amar Ranu