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“Regulating Wall Street” Prologue

“Regulating Wall Street” Prologue. Vaughan / Economics 639. Policy Responses to the Great Contraction. Emergency Relief and  Construction Act (1932) : Added paragraph 3 to Section 13 of Federal Reserve Act, opening discount window to nonbanks “in unusual and exigent circumstances.”

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“Regulating Wall Street” Prologue

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  1. “Regulating Wall Street”Prologue Vaughan / Economics 639

  2. Policy Responses to the Great Contraction • Emergency Relief and  Construction Act (1932): Added paragraph 3 to Section 13 of Federal Reserve Act, opening discount window to nonbanks “in unusual and exigent circumstances.” • Banking Act of 1933 (Glass-Steagall): • Created FDIC. • Separated investment and commercial banking. • Prohibited payment of interest on demand deposits/imposed ceilings on interest on savings deposits. • Banking Act of 1935: • Centralized Fed power (Board of Governors). • Gave Board power to double reserve requirements.

  3. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 Highlights: • Identifies and regulates systemic risk. Sets up a Systemic Risk Council that can deem nonbank financial firms systemically important, regulate them, and, as a last resort, break them up; also establishes an office in the Treasury to collect, analyze, and disseminate relevant information for anticipating future crises.

  4. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 Highlights: • Proposes an end to “too big to fail.” Requires funeral plans and orderly liquidation procedures for unwinding of systemically important institutions, ruling out taxpayer funding of wind-downs and instead requiring that management of failing institutions be dismissed, wind-down costs be borne by shareholders and creditors, and if required, ex post levies on other (surviving) large financial firms.

  5. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 Highlights: • Expands the responsibility/authority of the Federal Reserve. Grants the Fed authority over all systemically important institutions and responsibility for preserving financial stability. • Restricts discretionary regulatory interventions. Prevents or limits emergency federal assistance to individual institutions. • Reinstates a limited form of Glass-Steagall (the Volker Rule). Limits bank holding companies to de minimus investments in proprietary trading activities, such as hedge funds and private equity, and prohibits them from bailing out these investments.

  6. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 Highlights: • Regulates/promotes transparency of derivatives. Provides for central clearing of standardized derivatives, regulation of complex ones that can be traded OTC, separation of non-vanilla positions into well-capitalized subsidiaries, etc.

  7. Problems with Dodd Frank • Act does not deal with mispricing of pervasive government guarantees throughout the financial sector. • Systemically important firms will not be made to bear costs imposed on others in the system. • Act continues to regulate financial firms by form (bank) rather than function (banking). • Act fails to reform/regulate parts of the shadow banking system that are systemically important.

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