Policy Making and Legislation
U.S. monetary policies are affected by multiple regulations and statutes. For instance, the Glass-Steagall Act of 1933 forbade commercial banks from performing the actions of an investment bank. The legislation was passed during the Great Depression as a measure to prevent the additional failure of banks. The Glass-Steagall Act was repealed in 1999 by the Gramm-Leach-Bliley Act. This later act allowed commercial banks to resume investment banking activities and gave insurance companies and investment banks permission to conduct commercial banking activities.
In 2010, as a result of the financial crisis of 2008, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. The financial crisis of 2008 was an economic disaster that initiated a recession and almost crashed the U.S. banking system. The Dodd-Frank Act created two agencies: the Consumer Financial Protection Bureau (CFPB) and the Financial Stability Oversight Council (FSOC).The CFPB is an independent federal agency, and its mission is to protect consumers from predatory practices and ensure that the terms of various offers in the marketplace are transparent and fair. The CFPB's jurisdiction extends to financial institutions, including credit reporting agencies and debt collection companies. The FSOC is a federal organization that identifies risk and responds to those risks that affect financial stability. The FSOC consists of 15 members: 10 with voting rights and 5 without voting rights. The U.S. Treasury secretary is the chairperson for the council. The FSOC's mission is to monitor the financial well-being of banks that have the potential to affect the economy adversely if they fail. Banks deemed too large and that pose a systematic risk to the economy are broken up. The FSOC established an Orderly Liquidation Fund to aid in the disassembling of such institutions in order to prevent a further need for taxpayer bailouts. The FSOC also recognizes risks outside of the U.S. banking sector. For example, the FSOC identified the European Union debt crisis as a potential hazard. The European debt crisis was a period when governments had large amounts of debt, uncertainty existed around government-issued bonds, and financial institutions were failing. The European debt crisis began in 2008 with the failure of Iceland's banking system. By 2009, the crisis expanded to other European countries, including Italy, Spain, Greece, Portugal, and Ireland. The financial crisis of 2008 and the real estate market crash both contributed to the European debt crisis. However, the council noted that it was unable to manage this hazard by singling out any particular institution.
Development and Effect of Monetary Legislation
Each monetary regulation has an effect on the global economy. From a consumer perspective, the passing of the Glass-Steagall Act was a step to reestablishing the public's trust in the U.S. banking system. Customers making deposits into commercial banks had the reassurance that the federal government was acting to safeguard them from another banking collapse. The banking industry's perspective was less optimistic; it believed that the Glass-Steagall Act was a burden that removed financial institutions' ability to compete. Commercial banks were constrained to investing in low-risk investments that limited their returns. These lesser earnings eliminated any ability to compete with foreign banks that were not also constrained by these restrictions.
The banking sector's desire for deregulation resulted in the repeal of the Glass-Steagall Act and the signing of the Gramm-Leach-Bliley Act. This act allowed commercial banking and investment banking activities to be performed by one firm. The intention of the legislative reforms was to make the U.S. financial sector more competitive and provide clients with additional options. However, there can be unexpected consequences of regulation, and it is worth noting that many of the banks that participated in both commercial and investment banking activities required bailouts after the financial crisis of 2008.
From a consumer perspective, the Dodd-Frank Act was a response to the 2008 financial crisis that would hold bad actors accountable. The legislation offered protection for consumers from predatory lending practices and acted as a defense against another financial crisis. The financial industry's perspective was that the restrictions placed on the industry from various legislations had a directly negative effect on firms' profitability. This was demonstrated by the impact on small and local banks. The Dodd-Frank Act restriction proved cumbersome to small banks' profitability. The profit losses that many small banks experienced required them to cease car and mortgage lending and even stop offering free checking. Although most small banks had no role in the recession, many were harmed as a result of regulations intended for larger institutions.