Academic journal article Economic Perspectives

Dodd-Frank: Content, Purpose, Implementation Status, and Issues

Academic journal article Economic Perspectives

Dodd-Frank: Content, Purpose, Implementation Status, and Issues

Article excerpt

Introduction and summary

As financial regulation evolved over the past 80 years, it became common to introduce new legislation with the claim that "this is the most significant regulatory reform since the Great Depression and the Banking Act of 1933." On July 21, 2010, following the 2008-09 financial crisis, President Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (hereafter Dodd-Frank). In the view of many in the industry, Dodd-Frank became the new standard against which all future reforms would be compared. (1) The stated goals of the act were to provide for financial regulatory reform, to protect consumers and investors, to put an end to too-big-to-fail, to regulate the over-the-counter (OTC) derivatives markets, to prevent another financial crisis, and for other purposes. The act has far-reaching implications for industry stability and how financial services firms will conduct business in the future.

Implementation of Dodd-Frank requires the development of some 250 new regulatory rules and various mandated studies. (2) There is also the need to introduce and staff a number of new entities (bureaus, offices, and councils) with responsibility to study, evaluate, and promote consumer protection and financial stability. Additionally, there is a mandate for regulators to identify and increase regulatory scrutiny of systemically important institutions. As a result, macroprudential regulation (aimed at mitigating risk to the financial system as a whole) will play a much more important role than it has in the past (see Bernanke, 2011). Two years into the implementation of the act, much has been done, but much remains to be done.

The act continues to be debated in the political, business, and public arenas. Were the right lessons learned from the recent crisis? Were the appropriate reforms introduced in the new regulations? (3) Did the act go far enough or too far? Were the regulators given too much discretion in implementing the act? How burdensome are the new regulations and how will the intermediation process be affected? Will financial innovation be affected? Might regulatory reform induce some current financial activities to shift toward the less-regulated shadow financial sector? (4) Are banks finding ways to effectively avoid or cushion the impact of the new rules?

In this special issue of Economic Perspectives, we, and the authors of the accompanying articles, discuss and evaluate the Dodd-Frank Act from a number of perspectives. In this introductory article, we summarize the major components of the act addressing prudential regulation, particularly those aspects that are highlighted in the accompanying articles. We also discuss the economics behind many of the reforms considered. This is not an attempt to cover every aspect of the act--as with any legislation, there are certain issues amended to the legislation late in the drafting process that are well outside the realm of financial regulation: The authors of the accompanying articles in this issue are: a scholar who has been actively involved in critiquing the new regulation, regulators who are responsible for implementing some of the more important aspects of the reform, and a financial policy expert working with a banking trade association.

Matthew Richardson (2012), Charles E. Simon Professor of Applied Economics at New York University, provides a general evaluation of Dodd-Frank, highlighting many beneficial aspects of the reforms--these include efforts to measure and regulate systemic risk; expansion of the regulatory reach to nonbank, systemically important financial institutions (SIFIs); and efforts to introduce a new resolution process for SIFIs. He also addresses what he terms missed opportunities in the regulatory reform effort and the potential for adverse, unintended consequences.

Martin Gruenberg (2012), acting chairman of the Federal Deposit Insurance Corporation (FDIC), discusses the new powers given to the FDIC in Dodd-Frank to resolve select institutions deemed to be systemically important. …

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