Part 2: Regulation pre- and post-Lehman’s collapse

Regulatory reform in the post Lehman world: Have there been moves towards a safer financial system?

Under intense public pressure governments around the world have sought to introduce regulation to prevent a large scale financial crisis occurring again. On July 10^th 2010 the U.S. government introduced the Dodd-Frank Wall Street Reform and Consumer Protection Act. This law, which stretches to 2,319 pages, is wide-ranging in its scope. It creates a new Consumer Financial Protection Agency which has the role of monitoring the complex financial instruments within the financial system and educating investors on these instruments (Hallman, 2012). To try and regulate financial institutions deemed ‘too big to fail’ Dodd-Frank created the Financial Stability Oversight Council which has the power to take control of failing banks and unwind them. In addition, Dodd-Frank provided shareholders with a “say-on-pay” vote and restricted remuneration in financial institutions that received government funds.

(Obama signing Dodd-Frank: Google Images, 2013)

The Dodd-Frank reform sounds impressive with such a wide scope of reform but little has been done to implement Dodd-Frank which implies the regulators might have bitten off more than they can chew. The reform has also (as expected) come up against huge opposition from Wall Street for example in quarters one and two of 2012 the American Banker Association spent $4.6m to lobby on topics including Dodd-Frank (Hallman, 2012). In the UK the Bank of England established a Financial Policy Committee in 2011 and there are calls for extra taxes on bank bonuses (FT, 2013). The EU has introduced the European Systemic Risk Board.

At an international level the Financial Stability Board has introduced principles for sound compensation practices (Financial Stability Forum, 2009) and there has been the creation of Basel III. Basel III stresses the importance of capital including building up counter- cyclical capital buffers and maintaining higher levels of capital within the financial institutions  The Basel Committee has also increased the number of principles for good bank corporate governance from 8 to 14 (Basel Committee, 2010).

The question remains whether these regulations will be fully enforced, will they be held in place in times of rapid growth and whether they are really enough to protect the stability of the global financial system.

Bibliography

1.       Hallman, B. (2012) Four Years After Lehman, U.S. Banks Fight Reform. [online] Available at: http://www.huffingtonpost.com/2012/09/15/lehman-brothers-collapse_n_1885489.html [Accessed: 23 Feb 2013].

2.      Bis.org (2013) Basel Committee - BIS. [online] Available at: http://www.bis.org/list/bcbs/index.htm [Accessed: 23 Feb 2013].

3.      Financial Times (2013) Labour demands extra tax on bank bonuses - FT.com. [online] Available at: http://www.ft.com/cms/s/0/14e7f0c8-6a42-11e2-a3db-00144feab49a.html#axzz2LuGscvlW [Accessed: 25 Feb 2013].

4.         Financialstabilityboard.org (2013) Financial Stability Board. [online] Available at: http://www.financialstabilityboard.org/ [Accessed: 23 Feb 2013].