Dodd-Frank Act

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Financial regulation in the United States

Dodd-Frank Act

Federal Reserve

Financial regulation by state

Key terms

Commercial bank • Credit union • Depository institution • Financial system • Investment banking • Securities

Hover over the above terms for definitions.

The Dodd–Frank Wall Street Reform and Consumer Protection Act, also known as the Dodd-Frank Act, is a financial regulation law signed into law on July 21, 2010. The act was passed by the majority Democratic 111th Congress and signed into law by President Barack Obama. President Donald Trump pledged during his presidential campaign to make repeal or reform of the act a major goal of his transition. The stated purpose of the law 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 abusive financial services practices, and for other purposes." The Dodd-Frank Act provided for the creation or merger of various federal agencies. In addition, the law introduced changes to the nation's financial regulatory structure.^[1]

Federal governmental regulation of the private financial sector is the source of debate. Some, such as the Brookings Institution, argue that increased governmental regulation of banks and financial products (e.g., mortgages) can prevent large-scale financial crises, protect consumers from abusive practices, and stabilize financial markets. Others, such as the Cato Institute, argue that over-regulation of banks and financial products burdens business, stalls economic growth, and does little—if anything—to stabilize financial markets. There are varying opinions about the proper extent of governmental regulation. Some argue for increased regulation, some for decreased regulation, and others still for no regulation.^[2][3]

Background

The financial crisis of 2008, sometimes referred to as the Great Recession, launched the U.S. and the global economy into the most severe economic crisis since the Great Depression. Investopedia, an online financial encyclopedia, describes the recession as follows:^[4]

There are competing theories as to what led to the housing boom and bubble that spurred the recession of 2008. Some, such as Washington Post columnist Barry Ritholtz, blamed the banks for offering unaffordable loans to borrowers; others, such as Stanford economist and Reagan advisor John Taylor and Michael Bloomberg, blamed the federal government, arguing that government regulation mandated that these loans be offered. There is also debate about whether the repeal of the Glass-Steagall Act in 1999 contributed to the recession. In 2008, at the height of the crisis, U.S. gross domestic production growth slowed to 0.4 percent. The nation's unemployment rate spiked, hitting 10 percent in October 2009, the first time since June 1983.^[6][7]

This period of stagnant growth and high unemployment lasted from December 2007 to June 2009. During this time, the federal government spent $700 billion via the Troubled Asset Relief Program (TARP), a program signed into law by President George W. Bush in 2008, in an attempt to support the failing financial system. Lawmakers and economists supporting TARP, such as Paul Krugman and Federal Reserve Chair Ben Bernanke, claimed that certain financial institutions, such as Citigroup and Wells Fargo, were “too big to fail,” meaning that the failure of these entities would threaten the entire financial system. Critics of the program, such as Senator Elizabeth Warren, referred to this program as a bailout, arguing that the program forced taxpayers to rescue, or "bail out," a private industry.^[8][9]

Legislative history

President Barack Obama shakes hands with House Speaker Nancy Pelosi after the signing of the Dodd-Frank Act.

In June 2009, President Barack Obama proposed legislation to overhaul the U.S. financial systems. Major components of Obama's proposal included the consolidation of regulatory agencies, a reform of the Federal Reserve, and further regulation of financial markets, such as new capital standards for banks.^[10]

On December 2, 2009, United States Senate Banking Committee Chairman Chris Dodd (D) and Representative Barney Frank (D) submitted a revised version of Obama's proposal to the U.S. House of Representatives. Initial versions of the bill passed mostly along party lines, with a vote of 223-202 in the House and 59-39 in the Senate. The bill then moved to conference committee, where provisions such as the Durbin Amendment, a rule to reduce debit card interchange fees, were incorporated.^[11]

On June 25, 2010, the conference committee finished reconciling the House and Senate versions of the bills. On June 30, the House approved the revised bill 237-192. 234 Democrats and 3 Republicans voted in favor of the bill, and 19 Democrats and 173 Republicans voted against it. On July 15, the Senate approved the revised bill 60-39. 55 Democrats, 3 Republicans, and 2 Independents voted in favor, while 1 Democrat and 38 Republicans voted against the bill. President Obama signed the Dodd-Frank Act into law on July 21. At the signing ceremony, Obama said the following:^[11][12]

John Boehner (R), the House minority leader at the time of the bill's passage, said the following on July 15, 2010:^[13]

Provisions

New agencies

The Dodd-Frank Act created four new federal agencies: the Consumer Financial Protection Bureau (CFPB), the Office of Financial Research (OFR), the Federal Insurance Office (FIO), and the Financial Stability Oversight Council (FSOC).

Consumer Financial Protection Bureau

See also: Consumer Financial Protection Bureau

The Consumer Financial Protection Bureau is an independent government agency subordinate to the president created in 2010. It is responsible for consumer protection in the financial industry. The bureau's consumer protection activities include writing and enforcing regulations for banks and other financial institutions, providing financial information to consumers, monitoring markets, tracking consumer complaints, and preventing fraud. The CFPB may take action against institutions that employ predatory practices, discriminate, or commit fraud, among other practices. The CFPB can write and enforce regulations for financial institutions with assets exceeding $10 billion, as well as their affiliates.^[14]

Financial Stability Oversight Council

Daniel K. Tarullo, a member of the Board of Governors of the U.S. Federal Reserve Board, at an Office of Financial Research and Financial Stability Oversight Council conference

See also: Financial Stability Oversight Council

The Financial Stability Oversight Council is an organization established to monitor and respond to risks to the United States' financial system. The nation's financial system is a complex network of banks and investment firms that facilitates exchanges between lenders and borrowers; it is the base for all economic activity in the nation. The council was created to identify risks to U.S. financial stability both within and outside of the financial services marketplace and to respond to threats to the U.S. financial system. The FSOC also aims to “promote market discipline, by eliminating expectations […] that the government will shield [financial institutions] from losses in the event of failure." The FSOC was created by Title I of the Act, and reports to the federal government.^[15]

Office of Financial Research

See also: Office of Financial Research

The Office of Financial Research is an independent bureau of the U.S. Treasury Department. The OFR's primary task is to provide data and analysis for the FSOC. The OFR compiles information about private banks and non-bank financial companies on the FSOC’s behalf. Like the FSOC, the OFR was created by Title I of the Act.^[16]

Federal Insurance Office

See also: Federal Insurance Office

The Federal Insurance Office is an agency within the U.S. Department of the Treasury. The agency was established to provide advice and expertise to the treasury department and other federal agencies. The FIO monitors the insurance sector, which encompasses home and auto insurance firms (but excludes health insurance companies), serves as an advisory member of the Financial Stability Oversight Council, advises the treasury secretary on insurance matters, and provides expertise and advice to other federal agencies. In its capacity as an advisory body, the FIO can require insurance companies to submit data not already available publicly. The FIO was created by Title V of the Act.^[17]

New regulations

Title II of the act expanded the liquidation laws for federally regulated banks to cover insurance companies and non-bank financial institutions as well. In general, the FDIC or Federal Reserve serve as the receiver for commercial banks, meaning that if a commercial bank declared bankruptcy, the FDIC or Federal Reserve take responsibility for the operation of the organization to recover the maximum amount possible from the organization's assets. Generally, the Securities Exchange Commission (SEC) takes receivership of broker-dealers, and the Federal Insurance Office of insurance companies. Title II requires the receiver to make a report containing a plan for the institution, such as whether the institution will be reformed or closed, available to Congress within 24 hours, and to the general public within 60 days.^[1]

Title IX revised the powers of the SEC and credit rating organizations. Revisions include the expansion of the SEC's whistleblower bounty program, which rewards individuals who provide information to the SEC that leads to an enforcement action against a financial institution of over $1 million in sanctions. The expansion includes job protection and confidentiality promises for the whistleblower. Additionally, the title initially restricted the availability of FOIA requests to the SEC, but these restrictions were repealed following passage of the act. Title IX recognized the ratings issued by credit rating agencies to financial institutions as matters of public interest, declaring these agencies gatekeepers in the market and expanding regulation over these agencies. The title also mandated the creation of an Office of Credit Ratings (OCR), a part of the SEC, to oversee these agencies, with provisions requiring these agencies to submit annual internal reports to the OCR.^[1]

Volcker Rule

Paul A. Volcker

Following the passage of the bill by the House, Obama proposed the inclusion of the Volcker Rule, which prohibits United States banks from making certain kinds of speculative investments that do not benefit their customers. This rule was named for United States Federal Reserve Chairman Paul Volcker, who originally proposed the rule. Volcker argued that such investments played a key role in causing the recession. This rule was included as part of the act as Title VI. The rule specifically prohibits banks or institutions that own banks from trading stocks, bonds, and other financial instruments with the bank's own money rather than that of depositors. It also prohibits these entities from owning or investing in hedge funds. Under these kinds of transactions, the trader was paid on the basis of the value of the transactions rather than the profit made for their client.^{[18] [19]}

The rule was scheduled to go into effect on April 1, 2014. However, a lawsuit by banks over certain provisions of the rule delayed its implementation, with many larger banks not complying with the rule. On April 11, 2016, over two years after the rule was scheduled to go into effect, several larger banks had requested a five-year delay for complying with the rule.^[20]

Durbin Amendment

In May of 2010, Senator Dick Durbin (D) introduced an amendment to Dodd-Frank that would enable the Federal Reserve to set interchange fees on debit cards. Interchange fees are fees merchants pay banks when customers use debit cards. Banks charge these fees to reduce the risk in bank card transactions. Fees were based on factors like fraud risk and authorization costs, and they were at the discretion of banks. Until the Durbin Amendment, these fees were unregulated. Three days after its introduction, the amendment passed the Senate 64-33. The Durbin Amendment was signed into law as a part of the Dodd-Frank Act.^[21]

The Durbin Amendment requires that interchange fees charged by a bank with greater than $10 billion in assets are subject to the Federal Reserve’s oversight. After the Federal Reserve Board was granted power to determine appropriate interchange fees, the regulatory body cut the average interchange fee from $0.50 to $0.24 per transaction.^[22]

Support and opposition

Support

Defenders of the act have argued that it is a necessity to protect the economy and that it has not stifled growth. Fortune, a multinational business magazine, has defended Dodd-Frank. In October 2015, Fortune wrote, "The financial sector is too important to any modern economy for the government just to sit back and let it implode. [...] So you might not think Dodd-Frank is the perfect fix. Wall Street certainly doesn’t. But the big banks are more lending focused then they used to be. And they have much more capital than they used to to absorb loan losses, which was really a big problem in the financial crisis." Senator Elizabeth Warren (D), a supporter of the act, praised the consumer protection aspects of the bill, saying, "These new rules are making our financial system more transparent, getting rid of a lot of fine print, and making sure that if a bank screws up, you have someone to call so you don’t get stuck with the bill.”^[23][24]

Opposition

Critics of the act have said the bill has stifled economic growth and has been ineffective. President Donald Trump was critical of the act during his presidential campaign. In an interview in October 2015, Trump said, "Dodd-Frank has made it impossible for bankers to function. It makes it very hard for bankers to loan money for people to create jobs, for people with businesses to create jobs. And that has to stop.” Trump pledged that repeal or major reform of Dodd-Frank would be a major goal of his transition team. ^[25][26]

Subsequent developments

Jeb Hensarling (R), chair of the House Financial Services Committee, sponsored an act intended to replace Dodd-Frank: The Financial CHOICE Act of 2016. The House Financial Services Committee approved the bill 30-26, with all Democrats and one Republican on the committee opposing the act. However, House Majority Leader Kevin McCarthy (R) said he did not expect the bill to reach Congress before the end of 2016.^[27]

On February 3, 2017, President Donald Trump signed an executive order soliciting recommendations from heads of regulatory agencies on parts of the Dodd-Frank Act to change.^[28]

On June 8, 2017, the House of Representatives passed the Financial CHOICE Act. The bill passed by the House repeals about 40 provisions of the Dodd-Frank Act. The bill allows banks to not be subject to the heightened regulatory requirements of Dodd-Frank by maintaining a 10-1 ratio of capital over borrowed money to withstand a financial downturn. It grants the president power to fire the head of the Consumer Financial Protection Bureau (CFPB) and the Federal Housing Finance Agency at any time and without cause, and grants Congress authority over the CFPB's budget. The bill also repeals the Volcker Rule, a rule which prevents commercial banks from making speculative investments for their own profits.^[29]

See also

• Financial Stability Oversight Council
• Office of Financial Research
• Federal Insurance Office
• Consumer Financial Protection Bureau

External links

• Commodities Futures Trading Commission
• Securities and Exchange Commission, Implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act

Footnotes