November 6 2010 We talked about the economic side of things Macro The housing bubble the stock market crash and govt response Micro What derivatives are and the role they played in the crisis ID: 745086
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Slide1
The Financial Crisis
Class 6- The Failure of Regulation?
November 6, 2010Slide2
We talked about the economic side of things
Macro: The housing bubble, the stock market crash, and
gov’t responseMicro: What derivatives are and the role they played in the crisis.
Last WeekSlide3
Regulation
Or more, precisely, lack of
What role did deregulation of the financial system play in the crisis?What are the new regulations that have been put in place to stop another crisis from occurring?
This weekSlide4
Not much regulation to begin with
Laissez-faire
If you wanted to leverage, you could do so easilyNot much government intervention
Before the Great Depression Slide5
There are technically two Glass-
Steagall
Acts, one of 1932 and of 19331933 one is what we most normally cite as THE “Glass-Steagall Act”
The latter one is more about regulation
Glass-
Steagall
ActSlide6
Established the Federal Deposit Insurance Corporation
Stop bank runs and protect consumers
Enacted a separation of commercial and investment banking
Glass-
Steagall
Act 1933Slide7
Investment Banking
Issue securities
Proprietary trading: use the bank’s own money to invest and make moneyCommercial BankingWhat you normally consider “banking”
Take deposits, give out loans
Glass
Steagall
Act 1933Slide8
The FDIC part is obvious
You want to protect the consumers!
Separation of investment and commercial bankingBanks took on too much risk with depositor’s moneyWhen they lost money, so did the depositors
Also, conflict of interest
Why the Glass-
Steagall
Act?Slide9
Gramm-Leach-Bliley Act 1999
Repealed the separation of investment and commercial banking
Of course, FDIC is still in placeThe “Chinese wall” is taken down
Repeal of Glass-
SteagallSlide10
It leads to conflict of interest that spurred the Act in the first place
Depository institutions are very important to the soundness of the financial system
If these were to go down as a result of securities losses, the effect would be dramatic.
Arguments against the RepealSlide11
Tightly regulated US financial institutions are losing the fight against less regulated foreign counterparts
The investments that these banks go into are not very high risk
Arguments for the RepealSlide12
The repeal of Glass-
Steagall
allowed bank holding companies to issue loans and trade securities based on those loansSome believe that this repeal contributed to the crisis
The AftermathSlide13
Rule created by the SEC (Securities and Exchange Commission) that limited the leverage ratio
They required brokerage firms to keep a certain amount of capital
Net Capital RuleSlide14
In response to requests from major investment banks, SEC releases large
i
-banks from the Net Capital RuleThis allowed these banks to drastically increase their leverage
2004 Slide15
International framework for banking supervision and regulation
Tighter definition of common equity
More stringent capital requirementIntroduction of counter-cyclical capital buffers
Basel III AccordsSlide16
Created the Consumer Financial Protection Bureau
Ending too big to fail
Make banks come up with living willsVolcker RuleSeparate proprietary trading from other parts of an investment bank
Dodd-Frank Bill