Regulatory agents in the world were not prepared for the explosion of the worst financial crisis that the global economy has faced in the 21st century so far. Banks failed, thousands of people lost their homes and jobs, and billions of tax dollars were used to rescue bankrupt banks. 

What was learned from this is that the lack of regulation was one of the greatest exponents of the crisis. Therefore, the European Union carried out reforms in the matter of laws, with the purpose of not repeating history. The largest are the Dodd-Frank Act, the Consumer Protection Act, and the international regulatory framework for banks Basel III in the European Union (EU), etc.

Dodd-Frank Act

The Dodd-Frank Act as stated by AmonAvis was created in response to the 2008 financial crisis to regulate and prevent abuse by large banks. The Act undertakes a profound financial reform covering almost all aspects of the financial services industry in response to the worst financial crisis since the great depression, intending to restore investors’ confidence in the integrity of the financial system and Panorabanks.

Supervision Of The Financial Market

The Financial Stability Council was created, which has the possibility of separating banks considered “too big to fail”, that is, banks that, if they fail, could put the entire economy at risk due to their size

Consumer Protection Act

The Office for Consumer Financial Protection was created to regulate credit cards, loans, and mortgages. Specifically, it regulates the rates at which credit is given and protects homeowners by ensuring that the bank verifies the borrower’s income, credit history, and employment status.

Regulation Of Hedge Fund Movements

The reform requires that hedge funds provide information to the Securities and Exchange Commission about their portfolios so their risk can be properly evaluated.

Basel III

This regulation, which came as an extension to the existing Basel II framework, is an international regulatory framework adopted after the 2008 financial crisis under the Financial Stability Board (FSB). The FSB was created by the Group of 20 (G-20), made up of nineteen individual countries and the European Union, to promote financial stability through increased international cooperation. The following are the key points of the agreement.

  • Minimum capital requirement:  Basel III increases the minimum capital requirement from 4.5% to 6%.
  • Counter-cyclical measures: Basel III requires a 2.5% capital buffer so that banks can cope with cyclical changes and still maintain the minimum capital requirement.
  • Leverage Ratio and Liquidity Requirements: Basel III introduces these requirements to ensure that banks do not borrow heavily and that they have sufficient liquidity in times of financial stress.

The international financial crisis, caused by excess liquidity and inadequate regulation of a highly integrated international financial system, brought the world economy to the brink of recession. Besides, the unilateral actions that the different governments initially adopted highlighted the difficulty of coordination in a multipolar economic world without clear leadership. 

Fortunately, rescue packages were approved and a consensus was forged on the need to recapitalize the banking system and insure deposits and interbank loans.