FIN FPX 5710 Assessment 3 Organizational Review of Regulatory Policies

The Sarbanes-Oxley Act of 2002 aimed to prevent fraud, enhance the accuracy of financial reporting, and restore investor confidence in the banking industry (Wagner & Dittmar, 2006). This act is mandatory for all public organizations, regardless of size, and mandates accurate financial reporting. Management and auditors are responsible for ensuring the complete and honest disclosure of financial information (soxlaw, 2008). The act includes internal control requirements, which mandate that leadership review financial reports within 90 days of their release (soxlaw, 2008). Criminal penalties, including up to 20 years in prison, are imposed for falsifying, concealing, altering, or destroying documents (soxlaw, 2008). While critics argue that this act places an undue burden on banks that have not engaged in dishonest behavior, particularly smaller institutions, it has significantly improved transparency between banks and their clients (Wagner & Dittmar, 2006).

Many regulatory measures have been implemented following major banking failures. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was passed in response to the 2008 financial collapse, which was blamed on risky banking loan practices. The act established several government agencies tasked with overseeing different aspects of the financial system (Kenton, 2019). For instance, the Financial Stability Oversight Council and the Orderly Liquidation Authority monitor financial stability and can dismantle banks deemed too large (Kenton, 2019). The Consumer Financial Protection Bureau was also established to prevent mortgage companies from offering high-risk loans that might default and to make mortgage terms clearer for consumers (Kenton, 2019). While the need for these regulations is evident, some critics argue that they make U.S. banks less competitive internationally and impose unnecessary burdens on community banks that were not involved in the 2008 collapse (Kenton, 2019).

Economic Implications

Banks are the primary channel through which money flows in an economy, making them arguably the most important financial intermediaries. Commercial banks allow consumers to open savings and checking accounts, take out loans, and purchase certificates of deposit (McConnell, Brue, & Flynn, 2018). These services give consumers access to larger sums of money for spending, which stimulates the economy, increases GDP, and provides opportunities for economic growth. Commercial banks are subject to strict regulations due to their role in managing public funds. Historically, these banks were often corrupt, as they operated without oversight. Today, commercial banks are limited in the types of assets they can hold and the loans they can offer.

Investment banks, like Midwest Global, act as financial intermediaries for corporations and governments. They primarily deal in buying and selling stocks and bonds to support corporate growth and economic expansion (McConnell, Brue, & Flynn, 2018). Investment banks also advise on mergers and acquisitions and offer brokerage services (McConnell, Brue, & Flynn, 2018). While investment banks contribute significantly to economic growth, they also pose a higher risk due to their ability to take on riskier assets. Regulations limit the extent to which these banks can take risks to protect the economy.

Regulatory Considerations

As Midwest Global prepares to go public, it will need to comply with all relevant regulations, which will result in significant changes to its structure and costs. Regulations restrict how banks can invest and earn revenue, and failing to comply can result in severe financial penalties. One such restriction involves limiting banks’ holdings of risky assets, such as common stocks (Mishkin, 2019). While risky assets can yield higher returns, banks are now limited in their exposure to such assets to protect taxpayers (Mishkin, 2019). Regulations also promote diversification by limiting the amount banks can loan in high-risk categories, thereby reducing the potential for bank failure due to risky investments (Mishkin, 2019).

Banks are now required to hold substantial amounts of equity capital to ensure that public funds are protected. This requirement discourages risky behavior, as banks have more to lose if they fail. Midwest Global will need to calculate its leverage ratio, the amount of capital divided by total assets (Mishkin, 2019). A leverage ratio below 3% results in additional regulatory restrictions, and the Basel Accords mandate that banks hold at least 8% of their risk-weighted assets as capital (Mishkin, 2019). While these regulations are costly to implement, they are designed to prevent the practices that led to the Great Recession.

The Sarbanes-Oxley Act will introduce the most significant regulatory change for Midwest Global as it transitions to a publicly traded