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Without These Two Changes, the Financial Industry Could Collapse Again

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Congratulations to the Runners-Up from the Ark Law Group Student Voices Scholarship ProgramCongratulations to the runners-up in Ark Law Group's Student Voices Scholarship Program! Over the next few weeks, we'll be sharing all of the 15 winning essays with you. In addition to being published on our website, each runner-up won a $50 gift card! We received many amazing entries answering one of the following two questions: 

  1. The “Dodd-Frank” Wall Street Reform and Consumer Protection Act was passed in 2010 to promote the financial stability of the United States by improving accountability and transparency in the financial system and to protect consumers from abusive financial services practices. Six years later, do you feel that the goals of Dodd-Frank have been met?
  2. What else could the financial services industry do to support greater financial equality for Americans?
Sarah Sauer—Runner-Up in Ark Law Group Student Voice Scholarship Program
Sarah Sauer

One runner-up in our Student Voices scholarship program is Sarah Sauer, a student at Oklahoma State University. Sarah writes that to protect American citizens, we need greater federal regulation in addition to a culture shift in the financial industry. With Dodd-Frank passed just six-years ago, she poses that it is unfair to suggest it either has or hasn’t worked for it’s intended purpose- to prevent another financial crisis. However, on the outside, it remains a concern that it is likely to fail, as both the total nominal debt and the debt ratios continue to increase for the largest institutions. A culture shift to remove profiteering motivations in finance is also a vital addition in order to prevent ulterior motives from overshadowing the safety of the consumer.

Sarah's full essay can be read below, or you download the PDF here.

Bookmark our scholarship site and be sure to check back for updates on our next opportunity.

The passing of Dodd-Frank was undoubtedly a step in the right direction toward regulating banks that contributed toward the famous recession of 2008. However, it is likely that the measures passed in the 2010 bill are still insufficient to halt a similar type of recession from occurring in the future. Ultimately, greater federal regulation combined with a cultural shift in the financial industry would be the most beneficial factors in protecting the assets of American citizens.

It would be unfair to state that the passing of Dodd-Frank was insignificant. The bill included sixteen major provisions to safeguard against a future financial disaster, including increased regulation of the financial industry, protocols for potential future disasters, and the creation of the Consumer Financial Protection Bureau. While the bill is very comprehensive, the overall goal of the bill has not been tested – preventing another financial crisis. Although it is not yet clear what would happen in this situation, it appears that the bill would fall short. Its biggest shortcoming is that it failed to decrease the debt size or ratio of the offending banks. As long as these institutions have enough debt to crash a world economy upon their collapse, the government will be forced to bail them out. If it did not, countless people would be left without jobs, and even more would lose their life’s savings. In a December 27, 2016 interview with NPR’s Jacob Goldstein, Neel Kashkari, who is the former person in charge of the 2008 bank bailouts (Troubled Asset Relief Program), and now the current president of the Federal Reserve Bank of Minneapolis, spoke about his views on Dodd-Frank. In his opinion, the bill would not change the outcome of a similar situation to the 2008 crisis, pointing out that the safety measures would not hold once officials were forced to make the same difficult decision. In particular, he pointed out that the documents pertaining to Title II (Orderly Liquidation Authority) are over 10,000 pages in length, and would be impossible to unanimously interpret in a high pressure situation. While the future remains unknown, it is unlikely that Dodd-Frank has achieved its goal.

There are two ways in which the American people’s savings and investments can be better protected. One is by placing greater debt and reserve restrictions on financial institutions. If the federal government wants to protect the nation from another financial crisis, it needs to address the debt ratios large banks are custom to keeping. It is impossible to know for sure how risky debt is, so banks should have more capital on hand in the event of a disaster. Additionally, there should be a size limit on the amount of debt held by one institution. If a bank wanted to exceed that number, it would have to split into two or more different organizations, to insure that the failure of one bank to properly asses the risk of its debt wouldn’t endanger the world economy.

Aside from federal regulation, change could also come from the financial industry itself. While most of the individuals who make up the financial organizations are fair and ethical people, it is clear that companies can take on a whole different culture that is independent from any one individual. As an example, consider the recent incident with Wells Fargo, where more than two million undesired or fake accounts were opened under the identities of Wells Fargo customers (CNN Money, Sep. 2016). While around 5,300 employers were fired, it should be noted that most of these individuals were normal people, under pressure to perform at the level expected of them. It is not possible to blame a single individual for this crime, and there is not one person whose idea it was to create these accounts. Mostly, the culprit was the culture of the bank, which emphasized sales and statistics as being more important than quality service. It is the responsibility of all company employees to understand the importance of quality, but the only way to implement change is from the top down. Executive leadership within financial institutions have be aware of the past shortcomings of the industry, and must create a culture of quality and integrity in order to self-regulate.

In conclusion, while Dodd-Frank was a necessary response to the financial crisis, it likely fell short of accomplishing its goal to prevent another crisis. Moving forward, the federal government should implement size and ratio limitations on bank debt, to ensure that banks will be able to pay for their miscalculations of risk. Additionally, it will be the responsibility of financial executives to create a culture of quality and integrity within their organizations, to ensure that sales or profit margins do not overshadow the safeguarding of custom assets.

Ross Kilburn

Ross Kilburn

Ross Kilburn is the co-author of The Ark Law Group: Complete Guide to Short Sales.

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Without These Two Changes, the Financial Industry Could Collapse Again