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Capital Investment Decisions - Assignment Example

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Capital Investment Decisions

The stated aim of this recently introduced legislation is “to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail’, to protect the American taxpayer by ending bailouts, to protect consumers from abuse financial services practices, and for other purposes” (GPO, n. d.). Even though this Act was passed with intent to protect the nation from another financial crisis, it adversely affects banks’ ability to extend financial assistance to various business sectors. This legislation noticeably reduces banks’ lending limits. For instance, the Act strictly requires banks not to lend money to risky projects or business organizations that are less likely to repay debts. Often, it cannot be possible to accurately evaluate the potentiality of capital projects or business acquisitions because those ventures depend on a set of uncertain future events. According to the American Bankers Association (2012), this Act has limited price thresholds for certain lending segments and framed new disclosure forms and procedures for all types of mortgages. As a result, large business corporations would face potential challenges in meeting business expansion needs timely. Another disappointing feature of this Act according to the American Bankers Association (2012) is that it has mandated many stronger legal liabilities in connection with real estate finance. Although these policy changes are effective to ensure the accountability and transparency of banking transactions, business houses often find it difficult to raise adequate funds to finance capital projects and acquisitions. Consequently, entrepreneurs and other business organizations would hesitate to undertake new business development ventures; and this situation would adversely affect the growth rate of the US economy as a whole. The Forbes writer Lenzner (2012) argues that the Dodd-Frank Act is a ‘confused, bloated law’ because this policy change has failed to address many concerns including cost, efficiency, and growth. 2. No economic policy can assure 100 percent that it can prevent a financial crisis in the future. In contrast, economic policies or legislative amendments are introduced to lessen the chances of economic downturns or to reduce the impacts of a future financial crisis. The Act implies that the US economy has to make some regulatory changes in order to forecast and respond to the next crisis effectively. Hence, the Dodd-Frank Act itself says that it would not guarantee the prevention of a future financial crisis. The US policymakers hold the view that America’s largest financial firms represent some of the major huge pillars supporting the US economy. They point out that damages to these pillars during the 2008 global financial crisis worsened the economic status of the nation. It is identified that the increased governmental support persuaded these big companies to borrow cheaply and to take greater risks. In short, the “too big to fail’ status of those large financial companies can be considered as a major factor contributed to the recent recession. According to Will Melick, the Gensemer Professor of Economics (as cited in Kenyon College Alumni Bulletin (2012), the Dodd-Frank Act contains provisions for certain restrictions on financial firms’ operational activities in exchange for the protection from ...Show more

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Capital Investment Decisions Capital Investment Decisions 1. The recently introduced changes in the lending regulatory environment, specifically with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, have significantly impacted banks’ ability to lend money to businesses for capital projects and acquisitions…
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