This week marked the fifth anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the most significant and controversial financial reform legislation since the Great Depression. Impacting virtually every aspect of the US financial system, the Act was signed into law by President Barack Obama on July 21, 2010.
Five years after enactment, the effect of the law continues to be hotly debated, largely along partisan lines.
Proponents believe that Dodd-Frank made the financial system safer by making banks less risky and prone to failure. Critics believe, however, that the Act has slowed economic growth due, in part, to its adverse impact on smaller banks. Proponents say it made the financial system safer by making banks less risky. Detractors say the law has hurt smaller banks and hamstrung the economy.
Although many of the rules required by the law have yet to be finalized, and, in some cases, even proposed, supporters suggest that US financial institutions are doing fine and that the American economy has been better than any other economy in the world due to the safeguards instituted under Dodd-Frank.
The Act’s sponsors, former Senator Christopher Dodd (D.-CT) and former US Representative Barney Frank (D-MA), stated this week that the Act’s creation of the Financial Stability Oversight Council, the “too-big-too-fail wind down authority” and the restrictions on residential mortgage lending are among the Act’s biggest accomplishments.
Many Republicans remain critical of Dodd-Frank. Representative Jeb Hensarling (R-TX), chairman of the House Financial Services Committee, has stated: “Five years later the big banks are bigger, the small banks are fewer and the economy remains moribund.”
Senator Richard Shelby (R-AL) spoke this week about the Dodd-Frank Act, arguing that the law needed to be replaced with legislation they say would spur economic growth.
“Dodd-Frank is the absolute epitome of Washington greed,” Hensarling said. He also repeated arguments he made in front of the House Financial Services Committee late last week that the law has imposed barriers on working- and middle-class Americans, who are having more difficulty opening fee-free checking accounts than ever before, and on minorities who he says are now unable to take out mortgages due to the qualified mortgage rules imposed by the legislation.
Hensarling also repeated an often-recited Republican argument that the Act imposes a crippling regulatory burden on community banks, causing one to close every day.
Both Hensarling and Shelby, clearly two of the Dodd-Frank Act’s most outspoken critics, argue that one of the Act’s biggest failures was that it codified “too big to fail” into law by giving big banks the ability to request a government bailout as long as they follow regulations intended to curtail risks in their organizations. They contend that financial institutions should never be allowed a bailout, because overly aggressive attempts to limit risk often lead to the unintended consequence of stymying economic growth.
Shelby, head of the Senate Banking Committee, said “I believe that less systemic risk is a good thing. That does not mean, however, that we should have a system devoid of risk.”
Perhaps the only point on which supporters and critics agree is that it is unlikely the Act will be entirely or substantially repealed any time soon (although Hensarling suggested he is willing to support such a repeal).
When asked the one thing that they would go back and change in the law if they could, Dodd responded that “some on the left didn’t think we went far enough, some on the right think we went way too far. I think we got it about right and a lot of people who complain about this couldn’t organize a two car funeral.” Frank said, “The one major weakness that I’ve seen in the implementation was this decision by the regulators not to impose risk retention on all residential mortgages. I regretted that one, but the banks had help from a lot of my liberal friends.” He added, “Secondly, if I had a magic wand, I would have merged the SEC and the CFTC, but that was never a politically realistic thing to do.”
Whether the debate continues for the next five years likely will be determined both by how the financial system withstands the next financial crisis as well as the outcome of the 2016 federal elections.