We Need the Right Financial Regulation

“Confusion is a word we have invented for an order which is not yet understood.” 

-Henry Miller

Regulation is a knee jerk reaction to what has already happened and can not be changed either by those who created the problem or those affected by the issues that lead to the cause of the problem to begin with. Regulation always happens after the loss of life or property in the case of the Financial Crisis of 2018.  We can not dispute that regulation can improve the way people do business and curb un-ethnical actions by business people. However, regulation can sometimes cause as many problems as it was meant to correct. In most cases, financial regulation is created by people looking to improve the business environment, but without industry expertise.  

The primary regulation that was implemented after the 2008 Financial Crisis has corrected or improved the transparency and guidelines that directly affect real estate. The legislation proposed included capital requirements for banks, derivatives, shadow banking, and executive pay.  The significant hallmark regulation is what is known as the Dodd-Frank Wall Street Reform and the Consumer Protection Act. The Dodd-Frank is the catch-all regulation that was proposed and has been implemented since 2010. The Dodd-Frank established the checks and balances to Wall Street firms to protect taxpayers from getting the bill due to massive financial institution losses. It also assures substantial reserve requirements that secure bank deposits. The Dodd-Frank allows for an orderly dismantling of financial institutions without the need of government/ taxpayer rescue, lending practices that require financial institutions to portfolio some of those loans, among other things.  In Europe, regulators prohibit the bank short-selling of financial instruments that was the main culprit in the Lehman Brother’s demise.

The proposed legislation and solutions implementation was a shocker to the banking system and players who for many years undermined the possibility of intervention by the government and believed the industry could self regulate. The Dodd-Frank reduced the potential for future financial crisis, but it also increased the regulation cost to the financial sector. Community banks can no longer be exempt from the Volker rule, which reduces the financial reporting for smaller banks and it also prohibits the speculative trading of complex securities like hedge funds and tranches that were believed to be the lowest common denominator and accelerated the market decline during the 2008 Financial Crisis.  However, higher cost of regulation, higher reserve requirements and fewer investment options available to the bank meant less money to lend to small business who are the backbone of the US economy. Thus, the banking industry was better capitalized, but less money was being lent out which meant small business did not have the funding needed to grow or stay in business, causing some to go out of business entirely.  One good thing about the Dodd-Frank is the “too big to fail” and giant institutions are no longer a systematic risk to the economy, well at least in theory. 

We can name some good and some bad outcomes of the regulation that came about due to the 2008 Financial Crisis. However, de-regulating the industry is not the way to resolve the issues the new regulation created for the financial sector.  Rolling back any regulation would mean less protection for taxpayers to foot the bill of “too big to fail” institutions or those that will take on risky trading like derivatives.  Many people lost their homes and only investment and were left in ruins while the CEO got paid and the corporation got the bailout. We can not afford to go through the same problems we were in ten years ago due to our inability to amend the regulation to better serve the country’s financial needs. We are not yet out of the woods and would need the right regulation in the financial industry to prevent the same from happening in the not so distance future. The current regulation has not been implemented long enough for data to be studied to determine what did or did not work and what might need to be changed.  We can not say that the lack of regulations or unqualified people who purchased homes or the banks that provided the financing were at fault. All we know is that all parties played a part in the act and all should take responsibility for what happened after 2008. We also believe regulation should be a living document that is changed and amended to meet the market and community needs as technology, and everything else changes with time.

References

Onaran, Y. (2018, September 10). Bloomberg - Are you a robot? Retrieved from https://www.bloomberg.com/graphics/2018-lehman-anniversary/

Perry, B. (2008, November 18). Credit Crisis: What Caused The Crisis? Retrieved from https://www.investopedia.com/university/credit-crisis/credit-crisis4.asp

Talton, J. (2018, May 29). Ten years after the panic, financial ‘deregulation’ is back in style. Retrieved from https://www.seattletimes.com/business/economy/ten-years-after-the-panic-financial-deregulation-is-back-in-style/

Wikipedia.org. (2018, April 14). Regulatory responses to the subprime crisis. Retrieved from https://en.wikipedia.org/wiki/Regulatory_responses_to_the_subprime_crisis

Wikipedia.org. (2019, January 29). Systematic risk. Retrieved from https://en.wikipedia.org/wiki/Systematic_risk