The Wall Street Reform and Consumer Protection Act of 2010
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The Dodd-Frank Act, or the Wall Street Reform and Consumer Protection Act of 2010, was enacted into law during the Obama administration as a response to the financial crisis of 2008. It was named after its sponsors, US Senator Christopher Dodd and US Representative Barney Frank.
The Dodd-Frank Act sought to introduce significant changes to financial regulation and create new government agencies tasked with implementing the various clauses in the law. The law affected many federal regulatory bodies and almost all parts of the financial services industry. It aimed to prevent another crisis, increase financial stability, and protect consumers from abusive financial practices.
Due to the perceived low regulation and high reliance on large banks, the sweeping Dodd-Frank Act aimed to introduce more stringent rules to avoid a re-occurrence of the 2008 financial crisis, increase financial stability, and to protect consumers from certain financial practices.
To achieve this, the Act established the Financial Stability Oversight Council (FSOC) to address issues affecting the financial industry and to protect consumers from abusive financial practices. The council was created alongside the Office of Financial Research under Title I of the Act. The two agencies work closely to monitor systemic risk and research the state of the economy.
The FSOC comprises ten voting members, nine of whom are federal regulators. The remaining voting member is the Treasury Secretary, who also acts as the Chair to the council. The council also includes five non-voting members. It can impose stricter regulations on institutions that are viewed as “too big to fail” and likely to pose systemic risk. It is responsible for promoting market discipline, identifying threats to the financial stability of the US, and managing emerging risks that threaten the financial system.
The Office of Financial Research (OFR) works alongside the FSOC by providing necessary data on the operations of the financial services industry. The OFR is authorized to obtain data from any institution in the industry to help in discharging its functions. It also issues guidelines to standardize how firms report data. The head of OFR is a Presidential appointee, subject to approval by the US Senate.
The Dodd-Frank law also established the Consumer Financial Protection Bureau (CFPB) to protect consumers from large unregulated financial institutions. The law also consolidated the functions of other agencies, including the Department of Housing and Urban Development, the Federal Trade Commission, and the National Credit Union Administration. The CFPB is charged with preventing risky business practices that are likely to hurt consumers. The CFPB requires lenders to disclose information to consumers in a way that is easy to read and conceptualize.
Another key provision in the Dodd-Frank Act is the Volcker rule, which prohibits banks from making high-risk speculative investments that may disadvantage their customers. The rule is named after former Federal Reserve Chairman Paul Volcker, who initiated it as a response to the financial crisis. According to the Volcker rule, banks are required to set up internal compliance mechanisms that are subject to supervision by regulatory agencies.
The rule limits banks from owning more than 3% of the total ownership interests in a private equity fund or hedge fund because they are considered too risky. Institutions tasked with implementing the Volcker rule include the Office of Comptroller of the Currency, the Federal Reserve System Board of Governors, the United States Securities and Exchange Commission, and the Federal Deposit Insurance Corporation.
The Dodd-Frank Act also introduced new measures to regulate risky derivatives such as credit default swaps (CDS). The CDS were traded over the counter prior to the financial crisis, and they were widely blamed for contributing to the crisis. The law created centralized exchange markets for swaps trading to reduce the possibility of default among traders. It also required greater disclosure to the public on swap trading to reduce the risks it posed to the public.
The act was criticized for failing to address the role of government policies in causing the financial crisis. It was largely political pressure on banks that led to an abundance of risky subprime mortgages — which led to the creation of credit default swaps as a means of handling the massive amount of high-risk mortgages.
Since the passage of Dodd–Frank, many Republicans have called for a partial or total repeal of Dodd–Frank that would weaken or even roll back many of the provisions of the Act.
The Financial Choice Act was introduced in June 2017, with the aim of making changes to the Dodd-Frank Act, which was very unpopular within the financial services industry and disliked by many individual investors as well, many of whom feel overly restricted by Dodd-Frank in their investing activities. The bill was submitted to the Congress following an executive order signed by President Donald Trump in February 2017, directing regulators to review the Dodd-Frank Act and present a report on possible reforms.
One of the proposed changes to the Dodd-Frank law is to reduce the powers of the Consumer Financial Protection Bureau and the Securities and Exchange Commission (SEC). The Act also gives the President of the United States the power to remove the directors of the CFPB and the Federal Housing Finance Agency (FHFA) that is charged with overseeing the mortgage market.
Although the Financial Choice Act did not advance in the US Senate, some provisions of the act were later incorporated into other legislation, such as the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018.
In 2018, the US government created the Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCPA) exempting dozens of U.S. banks from the Dodd–Frank Act’s banking regulations.
The primary purpose of the EGRRCPA was to ease some of the regulatory burdens on smaller banks and credit unions, which proponents of the law argued were unfairly burdened by the rules put in place by Dodd-Frank. The law raised the asset threshold at which banks are subject to stricter regulations from $50 billion to $250 billion, which exempted many smaller banks from the requirements of the Dodd-Frank Act.
In addition to these changes, the EGRRCPA also included provisions designed to help consumers, such as making it easier for people with student loan debt to obtain mortgages and offering free credit freezes to consumers in response to data breaches.
The EGRRCPA was generally supported by Republicans and some Democrats, who argued that it would help to stimulate economic growth by reducing regulatory burdens on smaller banks and credit unions. However, critics of the law argued that it weakened important consumer protections and could make another financial crisis more likely.
Overall, while there have been repeal efforts of the Dodd-Frank Act, many of its key provisions remain in place and continue to shape the regulation of the financial industry in the United States.
The Dodd-Frank Act was enacted with the aim of preventing a reoccurrence of the financial crisis that almost crippled the United States’ financial system. Proponents of the law argue that the law was necessary and made remarkable progress in regulating financial institutions, including those that were viewed as “too big to fail.” The creation of new regulatory agencies like the CFPB and the FSOC has made it possible to increase transparency and more closely monitor the operations of banks and protect consumers.
However, critics of the law suggest that it went too far in regulating the US financial industry and insist that it hindered the competitiveness of US financial companies compared to their foreign competitors. In fact, one of the unintended consequences of Dodd-Frank has been many US investors, unhappy with over-regulated US brokerage firms, being driven to trade through overseas firms.
Critics of Dodd-Frank further argue that the regulatory measures particularly overburdened small financial institutions that did not contribute to the crisis. Critics also claim that the low interest rates resulting from the financial crisis have affected the profitability of small banks, creating a twofold negative impact.
Whether the Dodd-Frank Act was good regulatory legislation or one of the most onerous government control grabs in history and an act that has only served to weaken the US economy remains a subject of controversy. However, it remains one of the most important pieces of financial reform legislation that had a significant impact on the US financial industry.
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