Assessment of Dodd-Frank Financial Regulatory Reform: Strengths, Challenges, and Opportunities for a Stronger Regulatory System

By Ludwig, Eugene A. | Yale Journal on Regulation, Winter 2012 | Go to article overview
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Assessment of Dodd-Frank Financial Regulatory Reform: Strengths, Challenges, and Opportunities for a Stronger Regulatory System


Ludwig, Eugene A., Yale Journal on Regulation


This Essay examines the key strengths and imitations of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the U.S. financial reform legislation written in the aftermath of the 2008 financial crisis under considerable political pressure. The legislation's strengths include an emphasis on stress testing, the creation of the Office of Financial Research, and a focus on the regulation of the largest nonbank financial institutions. The Act, however, does have several weaknesses. The legislation neither solves the regulatory arbitrage problem, nor simplifies supervision, by increasing-not decreasing-the number of regulators. It does not go nearly far enough in terms of regulatory requirements for nonbanks. The legislation is overly complex and uneven, resulting in weak to nonexistent supervision of certain activities and excessive regulation of others. Also problematic is that the legislation neither advances the quality of supervision and educational opportunities for supervisors, nor provides sufficient governance when the application of regulation becomes arbitrary. This Essay offers reforms to help repair the Act's shortcomings, including strengthening the business and audit lines of defense, creating more formal academic supervisory education programs for supervisors, and instituting more effective ombudsman programs within regulatory agencies.

Introduction ......................................................................................................182

I.Strengths of Dodd-Frank............................................................................... 184

A. Office of Financial Research ........................................................184

B. Regulation of Nonbank Systemically Important Financial Institutions ............... ...................................................................... 185

C. Emphasis on Stress Testing....................................................... ...186

II. Limitations of Dodd-Frank................. ..................................................... ....189

A. Regulatory Arbitrage and Supervisory Weakness ........................ 189

B. Exclusion of Shadow Banks from Regulatory Oversight Reforms............................................................................... ....... ....190

C. Excessive Regulation...... ............................................................... 191

D. Excessive and Uneven Regulation of Trading....... .................... ...192

E. Weakness in Systemic Regulation ............................................. ....195

III. What Else Could Be Done To Make a Positive Difference....................... 196

A. Strengthening the First and Third Lines of Defense..................... 197

B. Supervisory Education .................................................................. 198

C. Ombudsman Programs................ ..................................................199

Conclusion..................................................... ................................................... 199

Introduction

The recent financial crisis wreaked havoc on the economies of developed countries. In the United States, $17 trillion of household wealth was lost. From 2008 to 2009, the U.S. economy shed 8.3 million jobs,1 roughly equivalent to the entire population of New York City.2 In an effort to stem the crisis, the federal government created a $700 billion relief package, the Troubled Assets Relief Program (TARP),3 and then provided an additional $787 billion in economic stimulus through the American Recovery and Reinvestment Act.4

Europe continues to experience serious losses as the crisis continues. In May 201 1, the International Monetary Fund and the European Union agreed to bail out Portugal with a $116 billion assistance package.5 Portugal's deal followed a $146 billion6 package for Greece in May 201 0,7 $110 billion for Ireland in November 2010,8 and $4.

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