Dodd-Frank Wall Street Reform and Consumer Protection Act - Explained
What is the Dodd-Frank Wall Street Reform and Consumer Protection Act?
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Table of ContentsWhat is the Dodd-Frank Act?How Does the Dodd-Frank Act Work?Volker RuleWhistleblowing Under Dodd-FrankThe Future of Dodd-Frank
What is the Dodd-Frank Act?
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 governments 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.
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How Does the Dodd-Frank Act Work?
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 theres 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.