Tuesday, October 18, 2016

Re-Evaluating Dodd-Frank Wall Street Reform and Consumer Protection Act

Has Dodd-Frank Accomplished What It Was Supposed To?

The Dodd-Frank Act, passed in response to the 2008 financial crisis, is a federal law that places regulation of the financial industry under government control. Now, however, 6 years after its passage, many questions remain concerning whether the Dodd-Frank Act made the country's economy stronger and more protected.

As federal and state regulations are evaluated and altered, managing securities, commodities and other financial services becomes more complex. This is where it is crucial to have the services of an experienced, highly competent securities and corporate attorney to protect your business interests and keep you in compliance with the law.

Evidence against Dodd-Frank

Those who argue against the benefits of Dodd-Frank point to two major factors:

  • The slow recovery of the real estate market due to high student debt, slow rates of household formation, and tighter mortgage-lending regulations
  • The lowering of the mortgage credit to the middle class (down 15 percent) along with the raising of mortgage credit for the wealthy (up 21 percent)

These two factors are pointed out in a recent paper by Francesco D'Acunto and Alberto G. Rossi at the University of Maryland Business School. According to these two researchers, while Dodd-Frank addressed one of the major forces that can make financial systems safer -- responding to the general population's fear of recent events -- it did nothing to reduce debt in comparison to equity and did not stimulate solid economic growth. In fact, Dodd-Frank may have actually exacerbated economic growth problems.

Those who defend Dodd-Frank seem to believe that the Act improved the debt-equity balance by prodding banks to raise more capital, but Natasha Sarin and Lawrence H. Summers of Harvard University have released a report questioning whether Dodd-Frank has, in reality, made big U.S. banks any safer. Examining bank share instability relative to overall market instability, they found that big banks are at least as volatile as they were before the crisis, partially because they have lower capital values.

Critics of the negative evaluation of Dodd-Frank challenge the findings, stating that the pre-crisis price measurements were inaccurate, underestimating the risk to banks at the time. If this is true, it means that our new sense of higher measured risks is attributable to our increased awareness of reality rather than an appropriate criticism of Dodd-Frank. Nonetheless, Sarin and Summers found that major banks have a 4.6 percent risk of a 50 percent decline in a single year, not exactly reassuring.

Whether these figures indicate a greater bank risk or a stronger doubt that the government would not bail out the banks in another crisis is unknown. If data demonstrated that banks have increased their capital values in the interim that might provide some sense of security, but Sarin and Summers have shown that this is not the case.

Most experts agree that alterations need to be made to Dodd-Frank if our banks are actually going to be protected. No one is looking to roll back regulation, but it may be that, going forward, it's not tougher regulation of banks that is called for, but a smarter, more thoughtful process of financial regulation. 

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