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United States requires an urgent need for financial reforms which should aim at reforming and modernizing its financial sector which has drastically deteriorated in a couple of decades especially on the financial markets. This has occurred since the enactment of regulations on the nation’s banking, insurance and securities. As a result there has been experienced several economic crisis whereby millions of Americans have lost jobs, failure of businesses, low investment and savings returns e.t.c. This calls for a quick action in reforming the financial sector so as to protect and come up with a system that is sound, fair, stable and competitive towards the growth of the economy (Douglas 2006).
In 2008 there were economic crisis experienced in United States that led to collapse of the economy, this has since called for strong financial reforms interventions that need to be adopted in order to avert a repeat of the same in future. There is a proposed financial reform bill by the US government has been has greatly emphasized on early economic warning systems and transparency which shall help in protecting and ensuring that US citizens are economically secure. It will be of great contribution of this bill to the nation’s economy in various ways as it focuses on improving all the vital financial instruments. It is in this financial reform regulation that major priority is given to the consumer protection, the legislation has developed a federal agency which shall be the overall overseer of consumer lending and it also outlines regulations for various financial instruments. It shall also set a consumer protection bureau which has powers to clamp down any abusive acts by the credit card and mortgage lenders institutions (Kirstin,2007). Additionally the risks taken by banks through the financial reforms will be greatly reduced in order to boost consumer protection. For instance the regulation grants the government powers to break up any institution that shows a tremendous growth and its failure may trigger the economy of the nation.
Financial reforms shall require all the banks to increase the capital they hold in reserve for the loans that are exposed to slow recovery or default, however they are restricted to do so after a period of five years. This is to avoid the banks from holding back in lending money within the economic recovery period (Stewart, 2009). It is through the Volcker rule we see banks for the first time being banned from proprietary trading which involves getting bets by using their own money. Banks shall be limited to a maximum investment of 3% of their capital businesses such as the private equity banks and hedge funds.
The reform also focuses on creating transparency and accountability for derivatives which aims at protecting taxpayers from any future bailouts and limits the financial system from taking excessive risks. This will contribute in finding solutions and reducing occurrence of financial crisis such as those that occurred from 1998 to 2008 which led to explosion of the over the counter derivatives markets from $91 trillion to $592 trillion (Douglas 2006). Normally over the counter derivatives are expected to protect businesses from financial risks, however during this period they favored traders extensively since there were no regulatory rules. Therefore it is the reform agenda that will curb such scenarios by bringing accountability and transparency through; closing regulatory gaps, ensuring there is a central clearing and exchanging rate, safeguarding the un cleared trades, and ensuring there is a clear market transparency.
Securitization as drafted in the reforms will be enhanced through whereby companies which offer products such as mortgage backed securities shall be able to retain portions of risks to avoid selling garbage to the investors. Previously the trading that was in place involved selling of mortgages to people who could not pay for them, then repackaged them and branding them as asset backed securities and traded to investors as long as they made profit and this was just before economic crisis resulted. This led to subprime mortgage mess which contributed to the downfall of the economy. However in the financial reform several measures have been put in place to reduce the risks posed by securities such as retaining risks of at least 5%.
A financial reform once adopted will help in strengthening shareholders rights, executive compensation and ensuring corporate governance through ensuring that companies sets out policies to tackle compensation based on statements of finance (Ruppel, 2007). The reform gives a say to investors in contributing to decision making thus increasing accountability and this shall be through being allowed to vote on the executive pay, nominating the directors, having independent compensation committee’s e.t.c
The reform will enable the establishment of credit rating agencies office which has not been in existence, it will be based at the Securities and Exchange Commission and its main mandate will be strengthening and regulating credit rating agencies by developing rules for internal controls, transparency and penalties for poor performance. Unlike the previous agencies that used to market themselves as credit analysts however they failed to warn people understand the layers of the complex financial structure, the proposed agencies shall address major economic shortcomings and restoring investor’s confidence on the ratings. The new office will also ensure a compliance staff which will be required to nationally recognize statistical ratings and make public findings. Additionally it will ensure deregistration of agencies that do not perform and those that are not liable in accordance to the ratings requirements.
The financial reforms will highly contribute to the reduction of financial hazards in the economy, bring transparency and accountability in the derivative markets, help in limiting the building up of systematic financial risks and developing a more resilient US financial system that focuses on developing and maintaining a strong economic growth for the betterment of the economy at large.