width=123When U.S. President Barack Obama signed the Wall Street Reform and Consumer Protection Act in July, proponents hailed it as a way to stem overly aggressive banking and financial practices that touched off the United States' worst economic crisis since the Great Depression.

Among its many provisions, the reform act restricts some financial firms with commercial banking operations from trading in speculative investments; calls for a new consumer protection agency to address alleged mortgage and credit card abuses; and establishes new procedures to unwind too big to fail companies that benefited from controversial programs like the federal Troubled Assets Relief Program that some observers derided as a taxpayer funded bailout.

There is indeed much to admire about the legislation, say faculty at Emory University's Goizueta Business School and other observers. But they warn that the bill may also saddle some borrowers with additional costs, and may not address some of the root causes of the economic crisis.

On balance, the new act addresses a lot of very important issues in financial regulations, says Charles Goetz, a senior lecturer of organization and management and a distinguished lecturer in entrepreneurship at Goizueta. While the consumer protection components of the bill-and requirements for a significant percent of all derivatives to be exchange traded, or passed through clearing houses-are an important step forward, the Dodd-Frank [reform] Act leaves some big holes, such as not addressing Fannie Mae and Freddie Mac, which played an important role in the meltdown. It also does little to stop 'too big to fail' in the future. But overall, the problems in the financial industry demanded new regulations, and as such I'd give this legislation a B to B-plus.

Goetz says that one critical element not included in the legislation was something to be done to get banks to make more loans. He says this issue is crucial for getting the economy to grow again and to reduce unemployment, but concedes that maybe the legislation is not the best place for this step.

Despite its drawbacks, at least the legislation establishes some important ground rules for both the banks and non-bank financial institutions to follow, Goetz says. After all, you can't expect a single piece of legislation-even one more than 2,300 pages long-to address all the intricacy in today's overly complex financial markets. My best guess is that over the next few years, the legislation will require some significant tweaking.

There has been some concern, says Jagdish Sheth, a chaired professor of marketing at Goizueta, that the added regulation that comes with the financial reforms will mean higher costs for banks and other financial institutions that will be passed on to borrowers, but I don't think the added expense will be big enough to be a significant burden, he says. I believe the bigger issue involves something that happened more than a decade ago-the repeal of the Glass-Steagall Act that previously prohibited commercial banks from engaging in investment banking activities. Unfortunately, the recently passed reform act doesn't address this.

In 1999, as part of a bid to make U.S. financial institutions more competitive, the Gramm-Leach-Bliley Act repealed the Glass-Steagall Act of 1933, effectively letting commercial banks, investment banks, securities firms, and insurance companies consolidate. Sheth says the deregulation was a mistake.

You can't effectively apply the same regulations to banks, insurance companies and investment firms, argues Sheth. They are significantly different kinds of enterprises that need to be separated, and need to be separately regulated. If we required financial firms to de-link their commercial banking operations from their insurance and investment operations and set up separate regulated and de-regulated companies, the 'too big to fail' concerns would be largely moot.

But too big to fail is attributable to bad market structure and poor choices regarding exotic transactions involving over-the-counter derivatives and securities, says R. Christopher Whalen, managing director of Institutional Risk Analytics, a financial consulting services firm based in Torrance, CA.

More regulation won't fix that, he says. Instead, the added regulation, along with more restrictive accounting rules and banking rules [from the recent Basel III proceedings] will instead serve to constrict lending. Basically, the reform act has made banks into loan production offices for Washington, D.C.

Associate professor of finance at Goizueta Jeffrey Busse also says the reform act does not really eliminate the prospect of too big to fail bailouts.

No matter how bad it gets for them, the government won't let the biggest banks fail, he argues. The potential consequences are just too great. The regulations do make them less likely to require government help, but the only thing that will reduce the possibility of being too big to fail is legislation mandating smaller institutions, so the failure of any single bank won't dramatically impact the market.

The reform act may not have addressed the issue of limiting the size of financial institutions, but it does call for some banks to increase the level of capital, or cushion, they keep on hand. That's likely to have a mixed effect, he adds.

The increased capital requirements and other constraints are actually good in one respect for taxpayers, insofar as it should reduce the likelihood of another taxpayer-funded government bailout, Busse says. However, the higher reserve levels are equivalent to a more expensive cost structure for the banks. All else being equal, that suggests banks will need higher interest margins in order to maintain a particular profit margin.

If higher capital reserve requirements and other steps called for in the reform act had been enacted sooner, but on a more selective basis, the recent recession might have been less severe, suggests Ray Hill, an assistant professor in the practice of finance at Goizueta.

Before they enact limits on financial institutions' activity, legislators might first wish to consider the level of exposure that taxpayers have to the institution, he says. For example, they could have increased capital adequacy requirements on institutions that have access to taxpayer funds through the Federal Reserve, and they could have limited proprietary trading for those institutions.

And instead of mandating the creation of a new consumer protection agency to oversee mortgages and other transactions, regulators could have focused on enforcing the variety of consumer protection measures already in place, he adds.

Instead, Congress wrote another very long bill, Hill says. Since the implementation of all the mandates in the bill is left to various government agencies, it will be years before we know what the bill means for consumers and the financial sector. We do know, however, that creating more uncertainty in the current economic environment is bad.

Hill says the bond market already took a hit from this.

Under some conditions, when new bonds are issued and sold the Securities and Exchange Commission requires them to carry a rating from Standard & Poor's, Moody's Investors Service or Fitch Ratings, Hill explains. But because the new reform act appears to increase the liability that ratings firms have for the quality of their ratings decisions, the ratings companies recently told some bond issuers that they can no longer quote their ratings to satisfy the SEC requirements. That shut down part of the bond market, making it more difficult to raise financing capital, at least until the SEC recently agreed to temporarily drop its rating requirement as an ad hoc fix for the problem.

Hill is also concerned about the reform act's provisions for winding down too-big-to-fail institutions before they collapse and cause systemic disruptions.

No one knows how this is supposed to work, he says. How will this group recognize such an institution ahead of time? Some people argue that the bill just institutionalizes future bail-outs and makes them more, not less, likely. As far as consumers are concerned, I expect the reforms will increase the cost of credit and make it less available. Maybe some abusive practices will stop, but unscrupulous people will invent new ones.