Financial Regulation and Legislation in the U.S. By Lijing Xu, Mike D Angelo, Yashu Wan Hanying Chen Amanda Sherwin

Major Financial Legislation Federal Reserve System (Fed) Federal Deposit Insurance Corporation (FDIC) U.S. Securities and Exchange Commissions (SEC)

The Fed Federal Reserve Act of 1913 Banking Act of 1933 aka the Emergency Banking Act The Banking Act of 1935

Aims Stabilization and Growth The Steady Growth High Level of Employment Price Stability But How?

FDIC The Federal Deposit Insurance Act of 1950 Mission Vision

SEC Mission Oversees the key participants Stock Crush 1929 Securities Act of 1933 Exchange Act of 1934

The Investment Company Act of 1940 ·An act of Congress ·United States Public Law ·August 22, 1940

The Investment Adviser Act of 1940 ·United States Federal Law ·Regulate the actions of investment advisors

Senator Chris Dodd Pushes Financial Reform － March 15, 2010

Late-2000s Recession Beginning: December 2007, United States The outbreak of the financial crisis: 2007–2010 Reckless & Unsustainable lending practices A drop in international trade Rising unemployment & Slumping commodity prices

World Map Showing GDP Real Growth Rates of 2009

6 Key Points of Sen. Dodd’s Reform Consumer Financial Protection Bureau Financial Stability Oversight Council A new process Credit-rating agencies New limits on trading and investment activities Renovations on the structure of Feds

A Youtube Video － “ Too Big To Fail ”

What is the financial regulation ? Financial regulations are a form of regulation or supervision, which subjects financial institution to certain requirements, aiming to maintain the integrity of the financial system.

What is the different part of it?

1.Assessment of Risk Management Risk assessment is the determination of quantitative or qualitative value of risk related to a concrete situation and a recognized threat (also called hazard).

Disclosure requirement Disclosure requirement are a key element of financial regulation.

Example The Sarbanes-Oxley Act of 2002 took disclosure of information even further by increasing the incentive to produce accurate audits of corporate income statement and balance sheet. They use mark-to-market Accounting to achieve that.

before the regulation made… Before Mark-to-market Accounting, firm relied on traditional historical basis in which the value of an assets was set at its initial purchase price. The problem with it is that in the value of asset and liability because of change in interest rate or default are not calculate of the firm’s equity capital.

Let’s assuming the company operate well and pay constant dividends D in the future time. The price of the bonds will be

So the price of the stock will be ( D/i ) But if the interest rate increase, i will increase, the price of the stock will decrease, so the value of stock on the balance sheet will changed, this will not equal to the market value of equity capital

mark-to-market Accounting, however, avoid this problems The criticism was made only when asset values were falling, when mark-to-market Accounting was painting a bleaker picture of banks’ balance sheet, as opposed to when asset prices were booming, when it made banks’ balance sheets look very good.

2.Consumer Protection Regulation Consumer Protection Regulation has taken several forms, they required all lenders, not just banks, to provide information to consumers about the cost of borrowing and the total finance charges on the loan.

Before Consumer Protection Regulation, there were weak incentives for mortgage originators, typically mortgage brokers who were virtually unregulated, to ensure that subprime borrowers had ability to pay back their loans. Mortgage brokers weakened their underwriting standards, leading to subprime mortgage product such as “no-doc loans,” more pejoratively referred to as “liar loan,” in which they didn’t care the income.

So ….Mortgage brokers also had incentives to put households into very complicated mortgage products borrowers could not understand and which they couldn’t afford to pay.

Under Regulation Z of the Truth in Lending Act, in July of 2008, the Fed issued a final rule for subprime mortgage loans with the following four elements. 1. a ban on lenders making loans without regard to borrowers’ ability to repay the loan from income and assets other than the home’s value. 2. a ban of no-doc loan. 3. a ban on prepayment penalties. 4. borrowers’ can pay monthly basis

Here is the rule for all mortgage. 1. a prohibition on mortgage brokers coercing a real estate appraiser to misstate a home’s value. 2. a prohibition on putting one late fee on top of another and requirement to credit consumer’s loan payment as of the date of receipt. 3. provide good-faith estimate of the loan cost 4. a ban on misleading advertising.

Restrictions on competition Declining profitability as a result of increased competition could tip the incentives of financial institutions toward assuming greater risk in the effort to maintain former profit level. Two forms: Preventing nonbank institutions from competing with banks by engaging in banking business, as embodied in the Glass-Steagall Act, which was repealed in Restrictions on branching, which reduced competition between banks, but were eliminated in 1994.

Summary Asymmetric information analysis explain what types of financial regulations are needed to reduce moral hazard and adverse selection problems in the financial system. Not easy in practice Financial Regulation has not always worked well, leading to banking crises in the united states and throughout the world

reference The economics of money, banking & Financial markets, 2 nd Edition.