Financial Overhaul a Reality

Stock market graphsCongress has passed and President Obama has signed a sweeping overhaul of the rules that govern the nation’s banks and financial institutions. The new law represents the legislative response of the Obama administration and the Democratic-controlled Congress to the 2008 financial crisis. Called the Dodd-Frank Act after its key sponsors, Senator Chris Dodd of Connecticut and Rep. Barney Frank of Massachusetts, it aims to prevent future financial crises. The act creates more oversight of banks and money traders, installs new consumer protections regarding credit card and lending practices, and forces some formerly hidden financial transactions into the regulatory light.

The new law creates a Financial Services Oversight Council, which is tasked with watching for trouble in financial markets. It will have authority to require closer oversight of large financial firms whose failure might destabilize the overall economy. The council will be able to force a troubled company to sell off assets. In addition, the Federal Deposit Insurance Corporation is given new regulatory powers to seize and break up troubled financial firms whose collapse could trigger a wider crisis. Money spent on such “resolution” actions is to be offset by fees paid by the largest financial firms—not by taxpayers. The act also establishes a Consumer Financial Protection Bureau within the Federal Reserve as a watchdog over credit card and lending practices.

The full impact of the law won’t be realized for years, as many detailed rules and regulations remain to be devised. Critics worry that the creation of more bureaucracy could slow the economic recovery. Moreover, they say the reform leaves untouched many issues that were responsible for the recent financial crisis, including how to determine the real value of many of the securities traded on Wall Street.

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