Dodd-Frank Wall Street Reform Analysis

The Dodd-Frank Wall Street Reform and Consumer Protect Act, is a piece of financial reform legislation passed in 2010, shortly after the housing crisis, by the Obama administration. It is named after key sponsors Senator Christopher Dodd and Representative Barney Frank. This act served as a response to the financial crisis of 2008. Its intention was to decrease the risks in the U.S. financial system.
This act helped establish numerous government agencies, who are given the task of overseeing and regulating different aspects of the banking system. It is important to note, the Trump administration is working to repeal the act, as of June 8th. Recently, the Republican controlled U.S. House of representatives have voted to repeal and replace it with the Financial CHOICE act, which plans on

cutting back some key pieces of Dodd-Frank. However, it is unlikely to pass the U.S. senate, as is.
The keys agencies in the Dodd- Frank Act are as follows, “The Financial Stability Oversight council” and “The Consumer Financial Protection Bureau”
The former is tasked with monitoring the financial stability of large institutions, institutions informally referred to “Too big to fail”, who’s possible failure could result in devastating results in the overall economy, as we saw in 2008.

It is also tasked with providing restricting or possibly liquidations, delivered by the Orderly Liquidation Fund, which provides capital to aid in the closing of financial intuitions that have either been placed in receivership, in addition to preventing another government bailout via tax dollars.
Banks that are considered “Too big to fail”, can be broken up under the authority of the council. These are banks who may pose incredible systematic risk (risk in the economy). In addition, the council may require banks to increase their reserve requirements.
In addition, we have the CFPB, which is tasked with preventing predatory mortgage lending, this is believed to reflect that belief that the subprime mortgage lending was the key cause in the 2008 crisis. Furthermore, it no longer allows for mortgage brokers to earn increased commissions for closing loans with higher interest rates or fees. Eliminating the incentive of predatory mortgage

lending.

There are many compenents to the Dodd Frank act, however the most important one is the Volcker Rule, which regulates and restricts the manner in which banks can invest. Attempting to limit or eliminate high risk speculative trading. Basically, separating the investment and commercial functions of a bank. Banks are also no longer able to be involved with private equity firms or hedge funds. This is almost like a glass-Steagall Act-light if you will. Which was passed in 1933, legislation that was arguably the first to recognize the dangers of financial institutions being heavily engaged in commercial and investment banking concurrently.

The act also contains provisions that regulate derivates, such as CDS, which are believed to have played a vital role in the 2008 crisis. Primarily because of their exotic nature and the fact that they were traded over the counter, many were unaware of their size and the risk they imposed. For example, not only were people trading credit default swaps on mortgage backed securities, but eventually people were trading CDS’s on other CDS.
Finally, the Dodd-Frank Act, established the SEC Office of Credit ratings. This is again clearly because of the widespread belief that credit ratings agencies such as Standard & Poor, Fitch, and/or Moody’s were rating bad bonds as investment grades ones. This office is required to ensure that these agencies are being as accurate, reliable, and meaningful as possible in their ratings of corporate, businesses, municipalities, governments, etc. that they evaluate.