Banking Laws - Essay Sample

Introduction

The Dodd-Frank Act is a new regulatory framework that aims to streamline the banking sector. The Financial Analysis Office was set up to support the FSOC (McLaughlin et al., 2020). The Act unified the responsibility for consumer protection in the current CFPB. It centralized the bank's control, reassigning the Office of Thrift Supervision (OTS) duties to the other banking regulators (Handorf et al., 2020). A federal insurance monitoring office was created. The Emergency Authority of the Federal Reserve was changed, and its operations were subject to expanded public transparency and monitoring by the Government Accountability Office (GAO) (McLaughlin et al., 2020). Dodd-Frank's other elements included various financial system segments or selected market participant groups. This paper shall explore several aspects of banking regulations governing customer exploitations.

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Dodd-Frank needed clearing and trading more derivatives via regulated markets, reporting on products remaining in the over-the-counter market, and registering individual derivatives dealers and large traders with relevant regulators (Chaffee, 2010). New reporting and registration requirements were imposed on hedge funds. Agencies with credit rating increased transparency, civil liability requirements were subject to, and references to credit scores had to be excluded from laws and regulations. Executive compensation and securitization changes have been targeted at reducing incentives to over risk. Securitizes were subject to risk retention conditions, widely known as "skin in the game." Reforms to bank regulation were introduced so that bank defaults will be less likely in the future, including bans on some types of risky trading (known as the "Volcker Rule") (North & Buckley, 2012). In response to activities that caused issues in the foreclosure crisis, it has established new mortgage guidelines.

The Dodd-Frank Wall Street Finance and Consumer Protection Act were developed as a reaction to the financial crisis of 2008. Several new federal agencies have been set up under the Dodd-Frank Wall Street and Consumer Protection Act — usually restricted under the Dodd-Frank Act — under the regulation of specific provisions of the Act and certain aspects the financial system (Handorf et al., 2020). In May 2018, the Trump administration signed a new bill to overturn crucial legislation (McLaughlin et al., 2020). When Donald Trump was elected President in 2016, he vowed to eliminate Dodd-Frank.

Financial Stability

Dodd Frank's law governs major financial institutions' financial state through the Financial Stability Advisory Council and the ordinary liquidation authority. Therefore, it can have substantial adverse effects on the US economy (corporations deemed too big to fail). The Act also provides for the liquidation or dissolution of the financial firms purchased by the orderly liquidation scheme and prohibits the use of tax dollars to sustain them. The Board can break banks that are deemed to be so big that they face financial risk and force them to raise their capital needs. Besides, the nascent Federal Insurance Regulator defined and regulated insurance firms deemed too large to fail.

Consumer Financial Protection Bureau

It was developed under Dodd-Frank's umbrella and established by the Consumer Financial Protection Bureau (CFPB) to deter improper mortgage lending. It is believed that subprime mortgages were the root cause of the 2008 crash (McLaughlin et al., 2020). Also, CFPB encourages people to be aware of the mortgage conditions before accepting it. It deducts mortgage brokers from higher fees to close loans with higher charges and higher interest rates and allows hypothecators not to steer prospective borrowers into loans that lead to higher payments for the originator.

Other bank loans, including credit and debit cards, are governed by the CFPB, and bank claims are dealt with. It depends on lenders to report information in an easy-to-read and easy-to-understand way, outside of automotive lenders. One example of this is the simplified conditions of credit card transfers that have become available today.

The Volcker Rule

Volcker Law, another primary feature of Dodd-Frank, limits banks' ability to borrow, forbids risky exchanges, and prevents insider trading. Banks are not permitted to invest in private equity firms or hedge funds that are considered too dangerous. Volcker's law represents a backward phase in the development of the Glass Steagall Act of 1933, which first recognized the intrinsic dangers of financial institutions while expanding commercial and investment banking facilities (Chaffee, 2010). The Volcker rule, which sought to limit potential interests, did not encourage financial institutions to trade properly without the proper skin in the game, hence accounting for the regulation of derivatives, such as credit default swaps that were widely responsible for the financial crisis of 2008 (Handorf et al., 2020). Dodd-Frank has developed global swap trading centers to reduce counterparty default risk and boost liquidity in these markets. The Volcker rule also regulates the use of options by financial firms to prevent "too big to fail" institutions taking massive risks that could lead to the failure of the broader economy.

Securities and Exchange Commissions

Dodd-Frank has founded the SEC since rating agencies are suspected of adding false-positive investment scores to the financial crash, the Credit Ratings Office is blamed. The Office has to ensure that organizations provide meaningful and reliable credit values for businesses, municipalities, etc. Two broad regulatory divisions affect banks: safety and health regulations and consumer rights rules. Codes are usually made up of laws, rules of agencies, policy directives, and supervisory mechanisms established by lawmakers and government decision-makers.

Whistleblower Program

The new Sarbanes-Oxley Act (SOX) Whistleblower program was also strengthened and expanded by Dodd-Frank (Chaffee & Rapp, 2012). In particular, it has developed a mandatory bounty program which enables whistleblowers to obtain between 10% and 30% of the proceeds of litigation, extends the scope of the protected employee to include employees in subsidiary companies and affiliates, and extends the statute of limitations under which whistleblowers may claim against the employer (McLaughlin et al., 2020).

Safety and health regulation ensure that banks and other registry institutions are healthy and sound and that taxpayers' deposit insurance scheme is not unnecessarily compromised. Usually, this form of regulation centers on financial or surveillance mechanisms used to trace and inspect these transactions.

In terms of restrictiveness, security and health regulations have changed significantly over the years. During the Great Depression, the rules on safety and health were stringent (Chaffee, 2010). Regulators were concerned with separating commercial banking from investment banking and avoiding the convergence of multi-bank portfolios with insurance companies. However, in the 1980s, the nature of companies' activities and the limitations on some of them were restricted by the cessation of interest rate limits on savings deposits (Chaffee & Rapp, 2012). It enabled banks to experiment with bond underwriting and insurance purchases. Several years later, amid the savings and loan crisis, defense and public health regulations concentrated slightly, and capital provisions were increased, and absolute safety and health conditions were not fulfilled.

Public protection regulation is essentially what the term implies — laws structured to protect customers' interests in banking and other financial service providers' transactions. This legislation area focuses on several issues, including ensuring that borrowers are provided with accurate details on the measurement of credit rates for loans and rentals, the prevention of unfair lending, and clients' defense against improper government investigations of financial reports (McLaughlin et al., 2020). More recently, this security type protects clients from the unauthorized collection of confidential financial details by private corporations.

While depository institutions are a strong base for customer control, they are not unique. Privacy, banking, and customer identity laws, for example, typically cover a broader range of institutions, from banking organizations, mortgage providers, insurance firms, bond dealers, vehicles, and even pawn shops (McLaughlin et al., 2020). In particular, consumer laws affect a broader spectrum of market activities, especially legislation on privacy. For example, health care providers can comply with a national set of standards on patient protection. One interesting argument is that banks have a tighter supervisory system than most companies, which adds to more exacting execution.

The Purpose behind Bank Regulations

What about banks and financial institutions that require more in-depth, rigorous regulation? The justification for the regulation of protection and soundness is the government's safety net for banks and other depository institutions and the inclination towards moral hazard or unnecessary risk-taking between banks.

This security network provides deposit insurance, access to the Federal Reserve Discount Window, and payment guarantees on banks' money transactions (Chaffee & Rapp, 2012). The safety net can limit costly bank transfers and hysteria. Still, it may also encourage banks to take higher risks than they might otherwise because the deposit insurance fund — and, eventually, contributions — contracts liability if the bets are not repaid. Because the government provides the safety net, it has a clear interest in ensuring that banks work safely and securely (Chaffee & Rapp, 2012). Besides, one reason bank supervisors regulate and supervise banks is that they restrict the potential moral risk.

The reasoning for consumer protection legislation lacks the specific intent of safety and soundness legislation. The rationale for these regulatory measures is also based on the fact that it is challenging for particular customers of financial services to determine the accuracy of financial information is given to them (Handorf et al., 2020). This category of the customer may be prone to opportunistic conduct and unfair rates by financial firms with considerably more knowledge of these goods, resulting in less than efficient credit usage. For example, if banks were not required to report their costs and lending terms in a coordinated fashion, borrowers would not be able to balance one reasonable offer with another to pay more than they would have been required to pay for loans or to opt-out of the credit system entirely. Second, financial systems must not distribute credit in a way that represents complete and unbiased access to credit systems as part of customer protection regulations (Handorf et al., 2020). Prohibition of such discrimination by regulatory provisions is one form of ensuring that all individuals have fair access to credit.

Conclusion

In summary, new banking laws are aimed at improving the transparency and integrity in the sector. Implementing the regulations will reduce the risks and unethical practices in the banking industry, advantageous to both financial institutions and customers. The laws shall prevent a financial crisis in the future and ensure stability and improved industry performance. The consumers are protected and shall enjoy high-quality services at a reduced cost. The reduction of risks associated with banking will reflect by the decrease in service cost.