Banking
The Dodd–Frank Financial Reform
Financial Regulation

The Dodd–Frank Financial Reform

The Issue:

After the U.S. mortgage crisis of 2007 led to the severe global financial crisis and global recession of 2008-09, there was strong popular support for strengthening financial regulation in the United States, with the goal of reducing the frequency and severity of such financial crises in the future. Ten years later, there is a movement to roll back the regulations that were put in place.

The Facts:

  • The Dodd–Frank Wall Street Reform and Consumer Protection Act, signed into law in 2010, works to prevent banking bailouts or deposit guarantees from burdening taxpayers or encouraging “moral hazard” which is when awareness of the safety net encourages excessive risk-taking.
  • The banking provisions include higher capital requirements to make sure banks are unlikely to get over-extended and regular stress tests for financial institutions with above $50 billion in assets. The law extends supervision beyond banks to other financial institutions that are significant to the health of the financial system. It also established the Consumer Financial Protection Bureau to give households the same sort of protection against misleading or abusive provision of financial services as they have for consumer goods. And, among other changes, the reform improved regulation and transparency of derivatives.
  • Some on the Left seem to believe that Dodd-Frank has accomplished little. At the same time, others believe that the problem is too much financial regulation rather than too little. In response to an executive order by President Trump, the Treasury Department issued detailed recommendations in June to revise banking regulations. And, the House of Representatives approved the Republican-sponsored Financial-Choice Act, which would undo many of the key provisions instituted in the wake of the financial crisis.
  • It is easy to agree that Dodd-Frank can be improved upon, but it is insufficiently recognized that many shortcomings arise because some features that were in the originally proposed legislation were then cut out or neutered by Congressional opponents of regulation.
Is the Volcker Rule in the Cross Hairs?
Financial Regulation

Is the Volcker Rule in the Cross Hairs?

The Issue:

The “Volcker Rule” aims to prevent banks from taking excessive risks and to reduce the likelihood that public funds would be needed for bank bailouts. But critics say it imposes a heavy burden on banks and does not address the root causes that led to the Great Recession.

The Facts:

  • The rule prohibits banks from doing proprietary trading — when banks buy and sell securities or other financial instruments seeking to profit based on the securities’ price movements— and also from operating and investing in hedge funds and private-equity funds.
  • In practice, it can be difficult to distinguish between proprietary trading and other activities that depositary institutions conduct.
  • Recent research finds that the Volcker rule has made bond markets less liquid in times of stress, presumably because of the lack of clarity around the distinction between “market making” activities and proprietary trading.