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Dodd-Frank: A Solid First Step Towards Financial Reform, by Phoebe Rogers, Guest Contributor

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The Dodd-Frank Wall Street Reform and Consumer Protection Act, introduced in 2010 by the Obama administration with the purpose of avoiding another destructive financial crisis like that of 2008, is considered to be one of the most comprehensive financial reform bills in recent history. Approximately 2,300 pages in length, the bill impacted “every firm delivering financial services and every part of the economic and financial fabric of the United States, with billions spent on compliance”[1]. Numerous positive and negative aspects of the bill have come to light since its implementation. Despite the seemingly good intentions of Dodd-Frank, the disadvantages of the bill heavily outweigh the potential benefits it could bring to the American economy, rendering the bill ineffective. While the literature in favour of Dodd-Frank is limited, certain economists such as Michael S. Barr and Timothy F. Geithner attempt to show how the financial reforms work to avoid and protect in the event of another financial crisis. Meanwhile, experts including Charlotte Twight, Derek Fisher, and Eugene A. Ludwig have considered Dodd-Frank’s numerous shortcomings in their writings. Following a brief outline of the bill’s reforms and goals, one can observe how the intended positive consequences of Dodd-Frank - including additional transparency, attempts to plan for and avoid future failure, and increases in capital reserves – are outweighed by the bill’s shortcomings, which can be summarized in three points: poor implementation, unforeseen detrimental consequences, and the reinforcement of the structural elements that led to the financial crisis.

In order to properly assess the effectiveness and sustainability of Dodd-Frank, one must understand the bill’s main goals and reforms. Named after U.S. Senator Christopher J. Dodd and U.S. representative Barney Frank, who helped craft the bill, it’s main goal is to “decrease various risks in the U.S. financial system”[2] in order to avoid another financial crash. The bill is complex and lengthy, but for the sake of clarity we will consider its main reforms in three categories: those created to address the issues that led to the crisis of 2008, those created to protect against a future financial crash, and those created to better protect financial consumers. Overall, these include the creation of The Financial Stability Oversight Council and Orderly Liquidation Authority, The New Federal Insurance Office, the SEC Office of Credit Ratings, the implementation of the Volcker Rule, The Consumer Financial Protection Bureau, and whistle-blower aids and incentives.

The Financial Stability Oversight Council and Orderly Liquidation Authority (FSOC) and the New Federal Insurance Office (FIO) were created in order to monitor the “too big to fail” banks that are considered to be partly at fault for the 2008 financial crisis. A financial entity is considered too big to fail when its demise would have negative repercussions on the greater financial market, and consumers as a whole. The FSOC “monitors the authority of major firms, and can seek to dismantle financial companies that have been placed in receivership* and increase a company’s reserve requirements”[3]. Similarly, the FIO monitors large insurance companies, so as to avoid incidents like the downfall of AIG (The American International Group) in 2008.

Dodd-Frank’s policies were looking to avoid financial downfall, as well as prepare for future issues. The Volcker Rule limited the way in which “banks can invest, limiting speculative trading, and eliminating property trading”[4], or when investors use the firms’ money to make profits, as opposed to the depositors’. Dodd-Frank also modified derivative laws, like those surrounding credit default swaps*, which were seen as contributors to the crisis. When a bank trades its own money, thus employing proprietary trading, it uses shareholders money in its investments. This can lead to massive loss of shareholder money as well as conflict of interest. In limiting this, and creating “centralized exchanges for swaps”, the possibility of a swap party defaulting is decreased. Additionally, new laws requiring greater information disclosure for the public will increase transparency.

Finally, the creation of the Consumer Financial Protection Bureau (CFPB), the SEC Office of Credit Ratings, and additional whistleblowing programs were some of Dodd-Frank’s multiple steps towards greater consumer protection. The CFPB prevents banks from taking advantage of consumers in the housing market, and ensures that consumers understand the details of their loans, whether it be through mortgage information or credit and debit card details. In order to protect companies from making misinformed investment decisions, the SEC Office of Credit Ratings was also established to give proper credit ratings to companies, and eliminate conflicts of interest. Lastly, the existing Sarbanes-Oxley whistle-blower program was expanded in order to encourage and protect employees that choose to report any wrongdoings witnessed within their company.

Since the bill’s enactment many criticisms have arisen, and there are limited publications demonstrating the effectiveness and positive consequences of the Dodd-Frank financial reform bill. The positive consequences of Dodd-Frank include a greater collection of data through the Office of Financial Research (OFR), new transparency laws, attempts to plan and avoid future financial failures, increases in capital reserves thanks to new capital requirement laws, and avoidance of taxpayer bailouts. In the Yale Journal on Regulation, Eugene Ludwig states that the “single greatest advancement of Dodd-Frank is the creation of the OFR […], as it brings together a strong group of economists outside of the Fed for the primary purpose of studying, modelling, and warning, against systemic events”[5]. He conceded that the OFR would be more reliable if it worked separately from the US Treasury, but the establishment of the Office is nonetheless a step in the right direction. Furthermore Michael Barr, a former assistant secretary of the treasury for financial institutions, expressed his support for the bill in stating “opponents of financial reform are losing- there is a strong Consumer Financial Protection Bureau […], capital requirements are going up, derivatives are coming out of the shadows, and major financial firms will be subject to strict supervision”[6]. Heather Corzo, the Senior Legal and Policy Advisor for the AFL-CIO Office of Investment, also said that she was pleasantly surprised to see how efficiently the CFTC, or Commodity Future Trading Commission, “has moved to implement regulatory reform”[7]. The CFTC encourages competitiveness and efficiency, protects against fraud market manipulation, and ensures market integrity[8].

Supporters of the act argue that it will protect the American economy from experiencing another catastrophe. Timothy F. Geithner, in a Foreign Affairs article entitled “Are We Safe Yet? How To Manage Financial Crises”, argues that while Dodd-Frank protects the American economy from another modest crisis, it may inadvertently leave it susceptible to an extreme one[9]. Geithner expresses his support for Dodd-Frank whilst accepting the negative trade-offs certain safeties will bring. For instance, the bill’s derivative regulations protect consumers by limiting “risk-taking behaviour”[10], but subsequently limit bank’s profit-making abilities. Geithner also states that the “U.S. financial system’s vulnerability to a crisis depends not only on the strength of regulation designed to prevent one but also on how much freedom policymakers have to respond when prevention fails”[11]. While the bill took good steps towards reining-in risky behaviour, “fiscal and monetary policy are [already] more constrained then they have been for decades”[12]. Evidently, there are many positive aspects to Dodd-Frank, but many economists and scholars argue that Dodd-Frank was a missed opportunity, which has proven to be ineffective, sprouting numerous unforeseen consequences.

Criticisms of Dodd-Frank can be separated into three broad claims: that the bill reinforces the very issues that led to the crash of 2008, that certain reforms were poorly implemented and have led to unaccountable organizations, and that the complexity of the bill will have unforeseen detrimental consequences on the American economy. Charlotte Twight, Derek Fisher, and Eugene A. Ludwig (amongst many others) explore these notions in their writings.

Firstly, we explore how Dodd-Frank may end up reinforcing the issues that led to the financial crash of 2008. Charlotte Twight, in “Dodd-Frank: Accretion of Power, Illusion of Reform”, criticizes the power given to certain non-accountable nongovernment entities, and argues that many of the bill’s newly created entities are “expanding and reinforcing the very structural elements that contributed to the financial crisis of 2007-2009”[13]. According to her, these elements include government controls that encouraged risk taking, “implicit government guarantees of financial firms deemed ‘too big to fail’”, affordable housing policies that encouraged low-income buyers with poor credit to invest in homes, and “discretionary Federal Reserve monetary policy”[14]. The Financial Stability Oversight Council, or FSOC, was created to prevent risks that certain financial entities pose to U.S. economic stability. Twight states that the FSOC was given too much power, due to its supervision of “nonbank” financial institutions* (which were not previously supervised by the Fed). The council can impose “prudential standards” on any company that fits into a long-list of widespread considerations. Once a nonbank financial entity has been deemed to be in need of supervision, the FSOC can go so far as to place the company into orderly liquidation or receivership. Twight believes that FSOC processes deserve careful examination, as their methods are “circuitous” and can potentially lead to big banks becoming even bigger by accidentally protecting nonbank financial entities[15].

Twight also criticizes Dodd-Frank’s invasive surveillance techniques and the National Mortgage Database Project, and how they all may very well be reinforcing he issues that led to the financial crisis by giving powers to federal authorities which can give implicit guarantees to large firms. The quality of supervision is poor, there is weak corporate governance, and we find a new threat of unregulated shadow banking[16] that stems from bank’s inability to use their own money in investments. Eugene Ludwig specifies how the “legislation neither solves the regulatory problem, nor simplifies supervision, by increasing -not decreasing- the number of regulators”.[17] He also states that Dodd-Frank doesn’t advance the quality of supervision for supervisors, nor go far enough in terms of regulatory requirements for nonbanks. The more papers one reads, the more it seems as if every positive from the Dodd-Frank act has a negative counterpart. Even once the supervisors were implemented, there is a lack of “sufficient governance when the application of regulatory reform becomes arbitrary”.[18] The very notion of security on which the bill was created leads to a lack of profit-making ability, a trade-off that many do not approve of. Critics believe that the bill’s regulations hurt the competitiveness of the US financial market relative to its international counterparts. Moreover, the higher reserve requirements under Dodd-Frank, created in order to avoid over-lending and potential debt issues, means that banks have less cash to invest, or “hold in marketable securities”[19].

Furthermore, Twight argues that certain Dodd-Frank reforms were poorly implemented and led to unaccountable organizations. She begins by addressing issues with the OFR, or Office of Financial Research, a branch of the FSOC that collects data from private financial entities. Its Data Centers are massive, and the DFA shows no “reliable privacy protections” for the data gathered. Twight implies that “several key aspects of the OFR’s functions and structure merit close public examination”[20]. Another issue that Twight finds with Dodd-Frank is the unaccountable nature of the Consumer Financial Protection Bureau, which was created by Congress to regulate the offering of services and products as a branch of the Fed. Due to the way it was created, the CFPB has too much power and not enough supervision- Representative Jeb Hensarling labeled it as “arguably the single most powerful and least accountable federal agency in the history of America… designed to operated outside the usual system of checks and balances that applies to almost every other government agency”[21]. Dodd-Frank eliminated Congress’ power over the bureau, and vague legal language (among a dozen other issues) gives the bureau freedom from traditional constraints. Researcher Hester Peirce states that “in constructing the new CFPB, Congress delegated enormous power over a large portion of our economy to a single person who is unaccountable to the Congress, the president, or the public”[22].

Lastly, one can observe how the complexity of Dodd-Frank led to unforeseen detrimental effects on the American economy, and may have neglected the very consumers it was hoping to protect. One of Dodd-Frank’s main goals was to protect consumers and smaller financial entities. The bill’s “length and complexity”[23] is a recurring issue, leading many to misunderstand it or be unaware of its implicit widespread changes. Ludwig states that the legislation is “overly complex and uneven, resulting in weak to nonexistent supervision of certain activities and excessive regulation of others”.[24] This excessive regulation will negatively impact the financial entities that are incapable of spending large amount of money ensuring that they conform and act in accordance to the reforms. Many smaller banks, which are important in the financial market due to their direct contact with consumers, have had difficulties keeping up with the new rules and regulations. Countless have had to close, and since these small banks work most closely with average consumers- usually through small loans- the Dodd-Frank reforms are negatively impacting the consumers they were trying to protect.

Indeed, the bill may not be protecting the consumers it was hoping to protect. Critics believe that the new system of whistleblowing may not be as comprehensive as it seems[25]. The Harvard Law Review published an article in which it is explained that Dodd-Frank does not offer enough aid to whistle-blowers who choose to report issues internally. It is stated that “in order to assure that the robust and effective corporate internal compliance and reporting systems we value may continue to cultivate responsible corporate cultures, Congress should amend Dodd-Frank […] so that it may provide equivalent protections for potential whistle-blowers regardless of whether they choose to report internally or externally”[26].

Evidently, the effectiveness of the Dodd-Frank financial reforms has been called into question. Some believe that the bill is not a lost cause, and that certain modifications would render it more successful. These modifications include strengthening certain lines of defense, better implementing supervisory education programs, and creating ombudsman programs.[27] David Skeel, JD, writes in the Penn Wharton Review that the bill needs even greater transparency, that “policymakers should gives banks an incentive to downsize efficiently” and should be “mindful of activity outside the traditional financial system”, that financial institution bankruptcy laws should be facilitated, and that “off-ramps for small banks would be beneficial”[28].

Overall, the Dodd-Frank Wall Street Reform and Consumer Protection Act is a highly criticized and highly debated work of reform. While many experts argue that Dodd-Frank was a step in the right direction towards positive financial reform, others suggest that the bill is too complex, with poor construction and negative consequences. It is difficult to determine the sustainability of the bill due to its recent enactment. Financial markets are fluid, and many factors will come into play in the future that may undermine the efficiency of the bill. Considering the recent political upheaval brought about by the Trump administration, and the president’s opposition to Obama’s financial reforms, one can foresee the impending modifications to the bill, if not its termination.


[1] “Financial Regulatory Reform and Dodd-Frank Resource Center”, Davids Polk, https://www.davispolk.com/dodd-frank/ (accessed February 28th, 2017)

[2] “Dodd-Frank Wall Street Reform and Consumer Protection Act”, Investopedia, http://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp (accessed February 25th, 2017).

[3] Ibid.

*Note: “Being placed into receivership” is a type of financial bankruptcy in which a receiver is appointed to run the company’s finances. “Reserve requirements” are the amount of cash a bank must hold in correspondence with the amount of client deposits it has.

[4] “Dodd-Frank Wall Street Reform and Consumer Protection Act”, Investopedia, http://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp (accessed February 25th, 2017).

* Credit fault swaps are a type of derivative swap (in which two financial entities exchange financial instruments) where two parties “transfer the credit exposure of fixed income products”.

[5] Ludwig, Eugene A. “Assessment of Dodd-Frank Financial Regulatory Reform: Strengths, Challenges, and Opportunities for a Stronger Regulatory System.” Yale Journal on Regulation 1, no 29 (2012): 184

[7] Ibid.

[8] Fischer, Derek. "DODD-FRANK'S FAILURE TO ADDRESS CFTC OVERSIGHT OF SELF-REGULATORY ORGANIZATION RULEMAKING." Columbia Law Review 115, no. 1 (2015): 69-125. http://www.jstor.org.myaccess.library.utoronto.ca/stable/43153767.

[9]Geithner, Timothy F. “Are We Safe Yet? How To Manage Financial Crises.” Foreign Affairs, January/February (2017): 54-72 (p.71).

[10] Ibid

[11] Geithner, Timothy F. “Are We Safe Yet? How To Manage Financial Crises.” Foreign Affairs, January/February (2017): 54-72 (p.55).

[12] Ibid.

[13] Twight, Charlotte. "Dodd–Frank: Accretion of Power, Illusion of Reform." The Independent Review 20, no. 2 (2015): 197-226 (p.223) http://www.jstor.org.myaccess.library.utoronto.ca/stable/24562065.

[14] Ibid p.199

* “A U.S. nonbank financial company is defined as a company incorporated or organized under the laws of the U.S., and predominantly engaged in financial activities. Its consolidated assets related to financial activity represent 85% or more of that company’s annual revenue.” Investopedia

[15]Ibid p. 205

[16] “Dodd-Frank Wall Street Reform and Consumer Protection Act”, Investopedia, http://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp (accessed February 25th, 2017).

[17] Ludwig, Eugene A. “Assessment of Dodd-Frank Financial Regulatory Reform: Strengths, Challenges, and Opportunities for a Stronger Regulatory System.” Yale Journal on Regulation 1, no 29 (2012): 181

[18] Ibid p.181

[19] “Dodd-Frank Wall Street Reform and Consumer Protection Act”, Investopedia, http://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp (accessed February 25th, 2017).

[20] Twight, Charlotte. "Dodd–Frank: Accretion of Power, Illusion of Reform." The Independent Review 20, no. 2 (2015): 197-226 (p.207)

[21] Ibid p. 208

[22] Ibid p.211

[23] Twight, Charlotte. "Dodd–Frank: Accretion of Power, Illusion of Reform." The Independent Review 20, no. 2 (2015): 197-226. http://www.jstor.org.myaccess.library.utoronto.ca/stable/24562065.

[24] Ludwig, Eugene A. “Assessment of Dodd-Frank Financial Regulatory Reform: Strengths, Challenges, and Opportunities for a Stronger Regulatory System.” Yale Journal on Regulation 1, no 29 (2012): 181.

[25] "RECENT LEGISLATION." Harvard Law Review 124, no. 7 (2011): 1829-836. http://www.jstor.org.myaccess.library.utoronto.ca/stable/41149805.

[26] Ibid.

[27] Ludwig, Eugene A. “Assessment of Dodd-Frank Financial Regulatory Reform: Strengths, Challenges, and Opportunities for a Stronger Regulatory System.” Yale Journal on Regulation 1, no 29 (2012): 197-199.

[28] Skeel, David Arthur. “Five Years After Dodd-Frank: Unintended Consequences and Room for Improvement”. Penn Wharton Public Policy Initiative, Issue Brief: Volume 3, Number 10. https://publicpolicy.wharton.upenn.edu/issue-brief/v3n10.php

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