Regulating the Financial Services after the 2008 Economic Crisis

Regulating the Financial Services after the 2008 Economic Crisis
Regulating the Financial Services after the 2008 Economic Crisis
When the prices of real estate’s began to take a downward trend, when the mortgage
prices spiked, these were early signs of an impending economic crisis. These telltale signs were
observed in 2007, but the full-blown crisis hit the US in September and October 2008 and lasted
through to March 2009.This period also saw an increase in the prices of oil and other vital
commodities in the market. Mortgage firms including Fannie Mae and Freddie Mac the most
dominant in the US housing sector lost their market value. Lehman Brothers, an investment
bank, and AIG also collapsed despite government’s earlier intervention. Many citizens especially
those in the financial institutions lost their jobs adding to the masses of unemployed people. This
crisis was brought about by an unregulated shadow banking system and the housing boom
(Guynn, 2010). The government had to take drastic measures to alleviate the crisis. The
immediate response from the government was to reduce the interest rates and liquidize the
market by providing assistance to financial institutions and increasing government spending.
Since these were short term solutions, there was a need for the government to set up policies and
implement them in a bid to reform the financial sector and avert another economic meltdown like
the one of 2008.Since then, the US governments have been putting up policies to cater for this
(Guynn 2010).
Reforms in the Financial Sector
These reforms started out as proposals that would address different issues in the financial
markets such as consumer protection, shadow banking, banks’ capital requirements and
enhancing the powers of the Federal Reserve. To date, some of these proposals have been
implemented while amendments continue to be made as unexpected challenges continue to
emerge during the implementation process.
The Troubled Assets Relief Program (TARP) heralded by the Bush administration was
the first long-term policy. Its primary purpose was to continually avail credit to its citizens and
their businesses and protect homeowners from repossession of their homes by mortgage firms
due to their failure to service their remortgages. Additionally, it was to keep the American
automobile industry afloat which by extension would enable hundreds of people to retain their
jobs (Reyes, 2013; Weinberg, 2013).Treasury injected an initial amount of up to 700 billion
USD. Term Asset-Backed Security Loans Facility developed by the US Department of Treasury
had the goal of providing credit to households and businesses whose owners had high quality
asset-backed securities (Weinberg, 2013).
The Dodd-Frank Act was proposed to oversee the regulation and supervision of financial
institutions in 2010. Its primary purpose was to monitor financial institutions whose presence in
the commercial market was critical if they ever failed through the Financial Stability Oversight
Council (FSOC). Some of these establishments are JP Morgan Chase, Wells Fargo, Goldman
Sachs and Bank of America. The Act called for the dissolution of OTS (Office of Thrift
Supervision) which had the mandate to regulate the real estate lending by the banking sector. In
its place, a regulatory firm for consumer protection, Consumer Finance Protection Bureau and
another agency that analyses systemic risk would be put in place (Guynn, 2010; Keats, 2015;
Wenberg, 2013). CFPB would ensure that families are provided with credit facilities that match
their financial ability and needs. In this way, household savings will be preserved and consumers
will no longer have to strain while servicing loans they had no prior knowledge about. The last,
Orderly Liquidation Authority (OLA) would assist the government to monitor financial
institutions and advise on the dissolution of those that whose failure would negatively affect the
entire financial market. This systemic risk firm would also ensure affairs in the financial market
are run transparently (Reyes, 2013; Weinberg, 2013). This Act also required large financial
Institution to write a procedure of how they could be resolved under the US Bankruptcy code
without assistance from the federal government or risking the entire financial system. This
authority also gave the FDIC the power to replace the management of institutions that seemed to
be failing The Volcker rule under this Act put up stringent measures that regulate how banks
could trade and invest. The lending rules it has put in place are so strict, and hence banks do not
acquire so much profit through lending as was the case before 2008 (Guynn, 2010; Keats, 2015).
Another reform targeted Capital which is usually set by the Basel Committee under the
supervision of US regulatory agencies. The amount required as overall capital was increased for
traditional banks with the systemically important banks given higher raises. The Liquidity
standards will limit maturity transformation of banks. In times of economic stress, banks will be
required to build capital from their earnings rather than use it to pay dividends (Weinberg, 2013;
Keats, 2015). The Basel community came up with liquidity reforms such as the Liquidity
Coverage Ratio which gave a thirty day limit of Liquidity coverage. The second reform
regarding liquidity was the Net Stable Funding Ratio was put a period of one year. The huge
financial organizations are now required to reinforce their liquidity buffers and improve how
they manage liquidity risks. These banks were warned against undertaking compensation plans
that would have them getting involved in excessive risks. Their compensation practices should
be in tandem with corporate governance and be approved by the management of these
institutions (Keats, 2015).
The Housing and Economic Recovery Act was enacted to restore confidence in the
mortgage industry. The first reform under this Act was to assist an estimated 400,000
homeowners by providing insurance amounting to 300 billion dollars in mortgages. A new
regulator was also established to provide oversight to the government-sponsored housing
enterprises i.e. Freddie Mac and Fannie Mae, and the government home loans banks (Guynn,
2010). This new regulatory agency was formed from the merger of previous authorities in the
housing sector. Raising the limit of mortgages the government-sponsored enterprises would also
assure financial stability. This Act also allowed the provision of loans to refinance mortgages
where the lending party was required to reduce the initial mortgage amount while the
homeowner benefited from appreciation in price. It also directed the state government to
collaborate with communities to help them identify, purchase and renovate properties that were
initially foreclosed under the massive scale Assets Purchase program. The national debt was
increased to a figure of 800 billion to allow for Treasury to assist the government-sponsored
enterprises when the need arises (Guynn, 2010).
The financial crisis was attributed to liberalized borrowing and unlimited spending based
on projected assumptions that did not materialize. During the crisis period, the government
attempted interventions which further worsened the situation calling for the immediate
implementation of long-term policies. The regulatory policies have been implemented through
the Bush and the Obama administrations, and these measures have stabilized financial
institutions especially shadow banks to enable them to survive without federal assistance in case
of another crisis. Also, the actions allowed the government to predict a crisis due to the risk
monitoring function and thus avert it in time.
Keats, R. (2015). US Banks Played a Pivotal Role in the 2008 Financial Crisis. Retrieved from
Weinberg, J. (2013). The Great Recession and its aftermath. Federal History Reserve. Retrieved
Guynn, R.D. (2010). The Financial Panic of 2008 and Financial Regulatory Reform. Retrieved
Reyes, A. (2013). The Financial Crisis Five Years Later: Response, Reform, and Progress in
Charts.US Department of Treasury. Retrieved from

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