The financial crisis that traces its way back to 2007 led to the collapse of large financial institutions and prompted national governments to bail out many from imminent collapse. The crisis affected other sectors of the economy like housing which led to the suffering caused by evictions and foreclosures. Eighteen months after the crisis began; Connecticut Senator Chris Dodd unveiled a bill aimed at reforming the financial sector and shielding the economy from unwarranted risks. In my opinion, Dodd’s bill will greatly help in preventing future financial crises.
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The bill will give the federal government powers to supervise firms that have assets over fifty billion US dollars. This would ensure that the economic stability of the country is not threatened by the collapse of large unregulated firms. The bill gives the state powers to come up with laws aimed at protecting consumers through a consumer protection agency and also monitor financial threats to the economy through a council of regulators.
The bill, therefore, presents a serious framework necessary to bring about improvements in regulating the financial sector. It should be noted that lax regulation was one of the major causes of the collapse and this bill will ensure that large financial institutions will now be under scrutiny than ever before, discipline in the market will be strengthened and early warning systems put in place.
Nonetheless, the bill compels large firms that were previously seen as “too big to fail” to have prior specifics to be followed if they become insolvent and need to be liquidated. This specification is important because firms will be forced to simplify their excessively intricate global operations. Market discipline is pertinent to a better financial system. The bill addresses this crucial facet through its proposal for an increase in the capital requirements and also its specification that firms that provide collateral to loans must keep a 5% stake in the loans. This will ensure that those who provide the security are honest in their operations.
The bill will ensure that credit rating agencies give information and estimate that can be relied on. These agencies have been faulted for not playing their role to avert the crisis, especially when it came to assessing defaults that precipitated the housing bubble. The bill makes far-reaching proposals that will ensure that there are amendments in the legal status of the rating agencies to ensure that their activities are strictly monitored by the SEC (Jaffe, 123). They will be compelled to provide greater disclosure of the methods and data they use to provide ratings and make risk assessments.
Besides, the bill gives shareholders a say when it comes to executive compensation. Some of the big firms affected by the crisis were accused of paying out massive unregulated executive compensations. By ensuring that shareholders have a say in the amount of compensation paid, it will not only enhance corporate governance but will ensure the executives are only compensated in tandem with the performance of the company. Hedge funds that have for a long time been operating outside the financial regulatory framework will be required to register with the Securities and Exchange Commission as investment advisors and be obliged to disclose information required to monitor systemic risks and protect the investors.
In conclusion, therefore, this bill provides the best opportunity of ensuring that there is financial stability in the markets and that there is no repeat of what happened 18 months ago. It is not entirely possible to do away with the risk of another financial bubble in the future, but prudent regulation will minimize the risks of another devastating crisis. Dodd’s bill provides the best opportunity in shaping the country’s financial sector.
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Jaffe, Ross W. Corporate finance, (9th edition). Chicago: McGraw-Hill, 1993.