Dodd-Frank Wall Street Reform and Consumer Protection Act

What Is the Dodd-Frank Wall Street Reform and Consumer Protection Act?

The Dodd-Frank Wall Street Reform and Consumer Protection Act was created as a response to the financial crisis of 2008. Named after sponsors Senator Christopher J. Dodd (D-Conn.) and Representative Barney Frank (D-Mass.), the act contains numerous provisions, spelled out over 848 pages, that were to be implemented over a period of several years.

Understanding Dodd-Frank Wall Street Reform and Consumer Protection Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act is a massive piece of financial reform legislation that was passed in 2010, during the Obama administration. The Dodd-Frank Wall Street Reform and Consumer Protection Act — typically shortened to just the Dodd-Frank Act — established a number of new government agencies tasked with overseeing the various components of the act and, by extension, various aspects of the financial system.

The Dodd-Frank Wall Street Reform and Consumer Protection Act was intended to prevent another financial crisis like the one in 2008.

Dodd-Frank Wall Street Reform and Consumer Protection Act Components

These are some of its key provisions and how they work:

Economic Growth, Regulatory Relief, and Consumer Protection Act

When Donald Trump was elected President in 2016, he pledged to repeal Dodd-Frank and, in May 2018, the Trump administration signed a new law rolling back significant portions of it. Siding with the critics, the U.S. Congress passed the Economic Growth, Regulatory Relief, and Consumer Protection Act, which rolls back significant portions of the Dodd-Frank Act. It was signed into law by President Trump on May 24, 2018. These are some of the provisions of the new law, and some of the areas in which standards were loosened:

Dodd-Frank Wall Street Reform and Consumer Protection Act Criticism

Proponents of Dodd-Frank believed the Act would prevent the economy from experiencing a crisis like that of 2008 and protect consumers from many of the abuses that contributed to the crisis. Detractors, however, have argued that the act could harm the competitiveness of U.S. firms relative to their foreign counterparts. In particular, they contend that its regulatory compliance requirements unduly burden community banks and smaller financial institutions — despite the fact that they played no role in causing the financial crisis.

Such financial-world notables as former Treasury Secretary Larry Summers, Blackstone Group L.P. (BX) CEO Stephen Schwarzman, activist Carl Icahn, and JPMorgan Chase & Co. (JPM) CEO Jamie Dimon also argue that, while each institution is undoubtedly safer due to the capital constraints imposed by Dodd-Frank, the constraints also make for a more illiquid market overall.

The lack of liquidity can be especially potent in the bond market, where all securities are not mark to market and many bonds lack a constant supply of buyers and sellers. The higher reserve requirements under Dodd-Frank mean banks must keep a higher percentage of their assets in cash, which decreases the amount they are able to hold in marketable securities.

In effect, this limits the bond market-making role that banks have traditionally undertaken. With banks unable to play the part of a market maker, prospective buyers are likely to have a harder time finding counteracting sellers. More importantly, prospective sellers may find it more difficult to find counteracting buyers.

What Are the Key Components of the Dodd-Frank Act?

Under the Dodd-Frank Act, the Financial Stability Oversight Council and Orderly Liquidation Authority monitored the financial stability of major financial firms because their failure could have a serious negative impact on the U.S. economy.

What Are Some Criticisms of the Dodd-Frank Act?

Detractors of the Dodd-Frank Wall Street Reform and Consumer Protection Act have argued that the act could harm the competitiveness of U.S. firms relative to their foreign counterparts. In particular, they contend that its regulatory compliance requirements unduly burden community banks and smaller financial institutions — despite the fact that they played no role in causing the financial crisis. Several financial-world notables argued that, while each institution is undoubtedly safer due to the capital constraints imposed by Dodd-Frank, the constraints also make for a more illiquid market overall.

How Could the Dodd-Frank Act Affect the Bond Market?

The potential lack of liquidity due to the higher reserve requirements under Dodd-Frank means that banks must keep a higher percentage of their assets in cash, which decreases the amount they are able to hold in marketable securities. In effect, this limits the bond market-making role that banks have traditionally undertaken. With banks unable to play the part of a market maker, prospective buyers are likely to have a harder time finding counteracting sellers. More importantly, prospective sellers may find it more difficult to find counteracting buyers.