Dodd-Frank Wall Street Reform and Consumer Protection Act Definition
Dodd-Frank Wall Street Reform and Consumer Protection Act or simply known as the Dodd-Frank Act was passed by the Barack Obama administration in 2010 in response to the recession of 2008. The aim of passing the Act was to create a financial regulatory system minimizing risk and ensuring accountability in the banking system. The law introduced several reformatory measures in the U.S. financial system to increase the government’s control over the financial industry. It puts strict regulations on the banks and other lender financial houses in order to safeguard the consumers’ interests and prevent another recession like 2008.
A Little More About the Dodd-Frank Act
President Barack Obama first proposed the bill in June 2009. In December 2009, sponsors U.S. Senator Christopher J. Dodd and U.S. Representative Barney Frank introduced new revisions in the bill, and in July 2010 it officially became a law and the law is named after Christopher J. Dodd and Barney Frank.
Dodd-Frank is a complex bill containing 2,300 pages and has 16 areas of reform. The Act is being implemented in the U.S. over the period of several years and many new government agencies were established monitoring the regulatory process and implementing changes.
Two major players in implementing the act are the the Federal Reserve Bank, Federal Insurance Office, Consumer Financial Protection Bureau (CFPB), Financial Stability Oversight Council (FSOC), and Orderly Liquidation Authority.
- FSOC – The responsibilities of the FSOC is to identify the risks and monitor the financial conditions of the major banks and financial institutions in order to ensure the financial stability of the country.
- Orderly Liquidation Fund – Financial companies placed under the receivership get money from the Orderly Liquidation Fund for liquidation or restructuring. It seeks to ensure there’s no need for a future tax money funded bail-out. The financial institutions can be forced to increase the amount of reserved money for potential crashes in the future.
- Federal Reserve Bank – The banks with more than $50 billion asset needs go through the annual stress test by Federal Reserve in order to ensure the institution could survive a financial crisis. The banks also need to submit a detailed plan of a quick shutdown on the occasions of approaching bankruptcy.
- Federal Insurance Office – Similarly, the operations of the major insurance companies which are considered to be too big to fail are monitored by the new Federal Insurance Office.
- CFPB – The Consumer Financial Protection Bureau (CFPB) safeguards the consumers’ interest against the corrupt practices of the financial institutions in mortgage lending. The subprime mortgage market is believed to be one of the main causes of the economic downfall of 2008. The CFPB tries to ensure that the consumers understand each clause of a mortgage before signing the papers. It prevents risky loans and resists the mortgage brokers to earn a huge commission for closing loans with higher interest rates. It also regulates credit and debit agencies and addresses consumer complaints.
One of the main components of this the Dodd-Franck Act is the Volcker rule, named after Paul Volcker, Chairman of Federal Reserves under presidents Jimmy Carter and Ronald Reagan. The Volcker rule requires the bank to separate their investment and commercial functions and minimize speculative trading. It also eliminates the propriety trading and restricts the banks from getting involved with hedge funds or private equity firms.
Whistleblowing Under Dodd-Frank
The whistle-blowing provisions in the law encourage citizens to report any violation in exchange of financial reward.
The Future of Dodd-Frank
The law has sparked debate among the economist and politicians, as many argue it slows down the economic growth in U.S. President Donald Trump during his campaign pledged to repeal the act.
References for the Dodd-Frank Act
Academic Research on the Dodd-Frank Act
· How to Improve Retail Investor Protection After the Dodd–Frank Wall Street Reform and Consumer Protection Act, Black, B. (2010).. U. Pa. J. Bus. L., 13, 59. The author of this article argues that there are ways to improve the consumer protections offered by the Dodd-Frank act. The author suggests that professional standards of care and performance be enhanced, and that concrete punishments and remedies be put in place to respond to violations of these standards.
· Could the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 be helpful in reforming corporate America? An investigation on financial bounties and …, Pope, K. R., & Lee, C. C. (2013). Journal of business ethics, 112(4), 597-607. This article examines the effectiveness of financial rewards and anonymous channels for whistleblowers as they are established by the Dodd-Frank Act of 2010. The authors find that financial bounties can offer incentives to report questionable acts, but the effectiveness of anonymous channels in encouraging whistleblowing are still uncertain.
· OTC-Cleared Derivatives: Benefits, Costs, and Implications of the’Dodd–Frank Wall Street Reform and Consumer Protection Act‘, Culp, C. L. (2015). Wall Street Reform and Consumer Protection Act’. This article examines the market of over-the-counter (OTC) derivatives and how it has been affected by the passage of the Dodd-Frank Act of 2010. This act forces all OTC derivatives to be cleared through a central counterparty (CCP), adding a new layer of complexity to the system. The challenges and risks of this new system are discussed.
· Dodd-Frank: Quack federal corporate governance round II, Bainbridge, S. M. (2010). Minn. L. Rev., 95, 1779. This article takes a critical view of the Dodd-Frank Act. In the context of the financial tumult of the early 2000s, the author presents Dodd-Frank as an ineffective piece of legislation by analyzing the state of the markets and the institutional causes of the financial chaos of the time.
· The Dodd–Frank act’s expansion of state authority to protect consumers of financial services, Wilmarth Jr, A. E. (2010). J. Corp. L., 36, 893. The author offers a detailed analysis of the conditions that led to the sub-prime mortgage crisis. This context proves useful when the article dives into the function of the Dodd-Frank act as an expansion of regulatory authority.
· Impact of the Dodd–Frank act on credit ratings, Dimitrov, V., Palia, D., & Tang, L. (2015). Journal of Financial Economics, 115(3), 505-520. This paper finds that the Dodd Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank) doesn’t meet its stated goals of encouraging credit rating agencies (CRAs) to provide more accurate or useful credit ratings. The study finds that CRAs are more protective of their reputation, and larger operations like Moody’s or Standard & Poor’s are more protective still. The overall findings show that more regulation is likely to have an overall, adverse effect on ratings information.
· The Dodd–Frank Act Establishes the Bureau of Consumer Financial Protection as the Primary Regulatory of Consumer Financial Products and Services, Mierzewski, M. B., DeSimone, B. S., Hochberg, J. W., & Larkin, B. P. (2010). Banking lJ, 127, 722. This article provides a general outline of the the Dodd Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank). This article was written at the time of Dodd-Franks creation, and offers a simple look into its intent and function.
· Missing elements in US financial reform: A Kübler-Ross interpretation of the inadequacy of the Dodd–Frank Act, Kane, E. J. (2012). Journal of Banking & Finance, 36(3), 654-661. This article takes a critical view of the Dodd Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank). By analyzing the lending and regulatory environment that led to the subprime-mortgage crisis, the authors of this article are able to point out the shortcomings and incentive conflicst that they believe are present in this piece of legislation. Recommendations are made regarding reforms that can address the underlying problems of the financial system.