The consumer protection provisions were created to avert future financial problems in the housing market.

U5 Response

There are 4 responses. Read each response and write a 75-100 word response for each one.

Response 1.) Kimberly

“The Dodd-Frank bill was a bill that was created by the Consumer Financial Protection Bureau to regulate mortgages and other financial products” (Mishkin.2019.p.232). The consumer protection provisions were created to avert future financial problems in the housing market. Some of the problems with the regulations are that they do not have enough provisions in place to protect everyone and their assets. Also, banks nowadays do not hold as much capital as they should cover certain expenses that may come about. The Dodd-Frank bill has to understand that it was created with the intent to help consumers and others with their money and assets to ensure that it is protected and not inadvertently taken away or some other malicious plot is done.

References

Mishkin, F. (2019). The economics of money, banking, and financial markets (5th ed.).

Response 2.) Bryana

Consumer protection will avert future financial problems in the housing market. Consumer protection will help the consumers from bearing losses due to fraud done by other parties or businesses on them. The fact that when you think about consumer protection this is something that in terms helps not only the consumers but can also be beneficial to the companies as well. Being able to detect or help find the fraudulent business practices that take place, and conducting major investigations would help many financial problems.

Reference:

Wild, J. J., & Shaw, K. W. (2019). Financial & managerial accounting: information for decisions (8th ed.). McGraw-Hill Education.

Mishkin, F. (2019). The economics of money, banking, and financial markets (5th ed.). Pearson.

Response 3.) Tomeka

How can financial derivatives create excessive risk in the financial system?

According to Jason Fernando, derivatives are financial contracts between two or more parties that derive their value from an underlying asset, group of assets, or benchmark.

Derivatives trade on an exchange or over-the-counter.
Derivatives prices derive from fluctuations in the underlying asset.
Derivatives are usually leveraged devices, which increases their potential risks and rewards.
The most common derivatives include futures contracts, forwards, options, and swaps (Fernando, 2021).
Derivatives can help investors control their positions by purchasing equities through stock rather than shares.

However, the downfall includes:

Counterparty risk.
The inherent dangers of leverage.
Complicated webs of derivative contracts can lead to systemic risks.
What is Systemic risk? Systemic risk is the possibility that an event at the company level could trigger severe instability or collapse an entire industry or economy (Chen, 2020). An example of systemic risk is the Dodd-Frank Act of 2010 passed by President Barak Obama to prevent another Great Recession.

Reference

Chen, J. (2020, December 26). Systemic risk: What you should know. Investopedia. https://www.investopedia.com/terms/s/systemic-risk.asp (Links to an external site.)

Fernando, J. (2021, October 30). Derivative. Investopedia. https://www.investopedia.com/terms/d/derivative.asp

Response 4.) Michael

Financial derivatives (e.g., interest rate forward contracts, financial futures contracts, options, and swaps) can put significant stress on the financial system, as seen with the AIG speculations (Mishkin, 2019). One reason is that financial institutions can expand their leverage too much. In leveraging, the institution puts up a small amount of money relative to the asset’s value. A second reason is the value of the derivatives can greatly exceed a bank’s capital.

As a result of these risks, regulators have increased disclosure requirements and updated the rules for derivatives trading (Mishkin, 2019).

Another risk, according to Allen (2012), is the risk of default of the derivatives clearinghouses. This study revealed that the Orderly Liquidation Authority of the Dodd-Frank regulations would not be effective in handling an insolvent clearinghouse due to the structural complexities and timing restraints. The complexity makes them difficult to rescue quickly and other clearinghouses would not be able to absorb the failing clearinghouse’s trades in a crisis.

Allen, J. L. (2012). Derivatives clearinghouses and systemic risk: A bankruptcy and Dodd-Frank analysis. Stanford Law Review, 64(4), 1079-1108.

Mishkin, F. S. (2019). The economics of money, banking, and financial markets (5th ed.). Pearson.

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The consumer protection provisions were created to avert future financial problems in the housing market.

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