I Understand the American Financial Regulations but…

America’s troubled financial regulatory reform bill was finally approved. It regulates banks’ dabbling in high-risk transactions and aims to prevent another financial crisis. Financial protection is a common international issue; however, we must ascertain whether the financial regulation must be determined by the markets and transactions of various countries.

The objective is made very clear in this bill, which is over 2,000 pages and needed 500 regulations to work out the details, to prevent a financial crisis like the “Lehman Shock” from occurring a second time.

Banks, which aim for a financial infrastructure called “deposit liquidation,” will prevent a situation in which operations are shaken by the losses caused by high-risk transactions. Former Federal Reserve Chairman Paul Volcker’s championed “Volcker Rule” became the bill’s fundamental philosophy.

Passed in 1933 after the Great Depression, the Glass-Steagall Act laid a framework for the American financial system in which there was a separation of banks and brokerages. Due to the rapid financial development after the 1980s, the Act was repealed in 1999. However, existing financial regulations and controls did not keep up with the complicated merger of commercial and investment banks, and the financial meltdown occurred.

The financial regulatory reform bill does not simply restore the Glass-Steagall Act, but also restricts the activity of financial institutions. The financial world’s opposition was that regulations take time to implement: For example, rather than a complete ban on investment in hedge funds from banks altogether, the bill allows banks to invest three percent of their capital.

When the operations of the major financial institutions deteriorated — and “too big to fail” rang false — they were bailed out with public funds in the end. The arrangements made in the bill allow for smooth bankruptcy procedures. The Financial Stability Oversight Council, which unifies regulation authorities, was also established and the Federal Reserve Bank’s authority was increased.

The massive financial meltdown disrupted the lives of many Americans. The major financial institutions which used public funds to save themselves now sing of high earnings. This bill tried to revive America’s financial system and, at the same time, the society which suffered from the flaws of that system.

Situated as it is within the international movement of a financial regulation review, this bill was trying to create a huge stir. Regarding the centrality of the monetary circulation that directly passes through the market in America, the financial structures in Japan and America greatly differ — e.g., in the independence of bank loans in Japan.

Japan should not mechanically adopt the same structure as America. Rather, we must consider the motive carried by the financial reform bill, which tries to prevent the relapse of a financial crisis.