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What is the Dood Frank Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act is a law that regulates the financial markets and protects consumers. It was enacted to try and prevent a repeat of the 2008 financial crash.
It is extremely comprehensive and is aimed to remedy banks investing depositors funds in unregulated derivatives.
The act is named after Senator Chris Dood and Congressman Barney Frank. It was enacted into law by President Obama in July 2010
The act was partially rolled back to ease pressure on small banks but otherwise remains a significant restriction on banks investing strategies.
Here is a quick eight point summary to explain what is the Dodd Frank Act.
There are eight ways that Dodd-Frank makes the financial system safer and protects consumers.
- It monitors Wall Street. The Financial Stability Oversight Council (FSOC) identifies risks that affect the whole financial industry. It monitors firm size and passes firms to the Federal Reserve for closer scrutiny if they get too big. The Fed can force firms/banks to increase their liquidity and access to ready assets. This is designed to prevent insolvency.
The FSOC has nine members. They include the Fed, the Consumer Financial Protection Bureau, the SEC, the Office of the Comptroller of the Currency, the Federal Housing Finance Agency, the Federal Deposit Insurance Corporation, and the Consumer Financial Protection Agency. Dodd-Frank also provided more rigorous support to whistle-blowers via Sarbanes-Oxley.
- Monitor large Insurance Companies. Dodd-Frank created a new Federal Insurance Office (FIO). It identifies large companies that create a risk for the system like the AIG did. It has reported the impact of the global reinsurance market to Congress. The FIO ensures insurers don’t discriminate against minorities.
- It reviews Federal Reserve Bailouts. The Government Accountability Office can review future Fed emergency loans, and the Treasury Department must approve the new powers. This calmed critics who thought the Fed went overboard with its bailouts.
- Stops Banks Gambling with Depositors’ Money. The Volcker Rule bans banks from using or owning hedge funds for their own profit. Banks can only use hedge funds at a customer’s request. This didn’t affect most banks as they operate within the parameter anyway.
- Monitors Risky Derivatives. The SEC or the Commodity Futures Trading Commission regulate the most dangerous derivatives. They are traded at a clearinghouse, similar to the stock exchange. The regulators can also identify excessive risk and bring it to policy-makers’ attention before a major crisis occurs.
- Oversees Credit Rating Agencies. Dodd-Frank created an Office of Credit Ratings at the SEC. It regulates credit-rating agencies like Standard & Poor’s and Moody’s. They helped cause the crisis by saying some derivatives were safe when they weren’t.
- Regulates Consumer Credit Cards, Loans, and Mortgages. The Consumer Financial Protection Bureau consolidated many watchdog agencies and put them under the U.S. Treasury Department. It oversees credit reporting agencies and credit and debit cards. It also oversees payday and consumer loans, except for auto loans from dealers. It also monitors credit and debit cards and credit reporting agencies. Banking fees are also under the purview of the CFPB. These include credit, debit, mortgage underwriting, and other bank fees.
- Brings Hedge Fund Trades into the Light. One of the causes of the 2008 financial crisis was that hedge fund trades had become so complex no one really understood them.
When housing prices fell, so did the value of the derivatives traded. But instead of dropping a few percentages, their prices fell to zero. To correct that, Dodd-Frank requires all hedge funds to register with the SEC.
They must provide data about their trades and portfolios so the SEC can assess overall market risk. This gives states more power to regulate investment advisers. Dodd-Frank raised the asset threshold from $30 million to $100 million.
By January 2013, 65 banks around the world had registered their derivatives business with the U.S. Commodity Futures Trading Commission or the CFTC. That compliance makes the world safer. It’s also why a Dodd-Frank repeal would create confusion for banks that had already registered.
The CFPB protects consumers in home real estate transactions. The Bureau wrote user-safety rules for all consumer financial products.
One of its important functions is levying fines against lenders who break its rules. It mandates that loan disputes be allowed to go to court, not just arbitration.
The CFPB was also instrumental in permanently increasing the Federal Deposit Insurance Corporation’s insurance on bank deposits to $250,000.
President Trump would like to repeal Dodd-Frank completely. Trump claims Dodd-Frank keeps banks from lending more to small businesses.
But the Act targets large banks. They have consolidated and grown since the financial crisis. Small businesses are more likely to borrow from small banks, not big banks. The biggest problem for small banks has been the low-interest rate climate that’s prevailed since 2008. It reduces their profitability.
Trump’s cabinet members say that banks no longer need the extra rules and supervision. They argue that banks have enough capital to withstand any crisis. But banks are only so well-capitalized because of Dodd-Frank.
Trump has weakened the CFPB by hiring staff who oppose it. As a result, enforcement actions have dropped by 75%, despite rising consumer complaints. At least 129 employees have left.
Trump’s plan would allow the president to remove the CFPB director for any cause. It would switch its funding from the Federal Reserve to Congress.
How Dodd-Frank Affects You
Most of Dodd-Frank addresses the fundamental banking industry problems that caused the financial crisis. It extends supervision to hedge funds, insurance companies, and other financial firms. Before the crisis, these companies didn’t want government regulation. During the crisis, they clamored for a bailout on the taxpayers’ back. The Act also protects consumers from getting ripped off by credit card companies, payday lenders, and others.
Dodd-Frank allows the US government to identify banks and insurance companies that are becoming too big to fail. During the financial crisis, the government had no authority to stop financial firms from taking on too much risk. It’s one reason why Lehman Brothers went bankrupt and insurance giant American International Group Inc. required a bailout.