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Big banks returning to riskier activities? 

January 20, 2015

Mark Roe, Gulf Times 

Last month, the US Congress succumbed to Citigroup’s lobbying and repealed a key provision of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act: the rule that bars banks from trading derivatives. The Dodd-Frank law’s aim was to prevent another financial crisis like that of 2007-2008; the repeal reduces its chances of success.
Derivatives are contracts that derive their value from changes in a market, such as interest rates, foreign-exchange rates, or commodity prices. 

Banks can use derivatives to hedge risk – say, by ensuring that oil producers to which they lend lock in today’s prices for their product through derivatives contracts, thereby protecting themselves and the bank from price volatility. 
The borrower is thus more likely to be able to repay the loan, even if its product’s price falls. But derivatives can also be used for speculative purposes, allowing banks to take on excessive risk.

Read More: Gulf Times 

 
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