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Where Did The Liquidity Go? The Cost of Financial Regulation to Foreign Exchange Markets

By James Stevenson

In financial markets, the terms “bull” and “bear” markets are used to describe the cyclicality of asset prices. Similar to asset price cycles, there are cycles in regulatory scrutiny. Beginning in the 1980’s, regulatory scrutiny diminished, cumulating in the repeal of the Glass-Steagall Act in 1999, allowing commercial banks and securities firms to be housed under the same roof for the first time since the 1930’s. In the aftermath of the global financial crisis in 2008 and 2009, the tides have reversed on financial regulation. With the Dodd-Frank reforms in the United States, and similar regulation being signed into law around the world, it is unknown how new regulation will affect financial markets. Legislators wrote the new rules in hopes that they would create safer financial institutions, but at what cost?

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Advisor: Connel Fullenkamp | JEL Codes: G1, G12, G18 | Tagged: Dodd-Frank, Financial Regulation, Foreign Exchange, Market Liquidity, Volcker Rule


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