Running head: Dodd-Frank Act 1
Dodd-Frank Act
Harrison Emshoff
Texas Woman’s University
Dodd-Frank Act 2
The Dodd-Frank Act
The Dodd-Frank Act got enacted into law in July 2010. The act is entirely known as
Dodd-Frank Wall Street Reform and Consumer Protection Act (Act & Protection 2010). The act
is 0f federal legislation in the United States of America that puts the financial industry
regulations under the federal government control. The fundamental aim of the Act is to create
accountability and transparency in the financial management sector as well as minimizing risk
resulting from corruption and fraud. Besides, the goals of the Dodd-Frank Act was to place
financial institution under a strict measure and regulation. This is as a result of the recession
experienced in the late 2000s due to a high level of negligence and laxity by the large banks in
the United States of America. As a remedy to the financial crisis and recession experienced in
America, the Act created the Financial Stability Oversight Council (FSOC) (Act & Protection
2010). Financial Stability Oversight Council helped to solve the persistent crisis in the financial
sector and reducing the probabilities of another recession in America.
The act was signed into law by President Barrack Obama on July 21st, 2010. The act
was written after the major financial crisis experienced by the United States in 2008. The act has
pioneered a complete change of the policies governing the financial sector. The primary role is to
prevent possibilities in the financial crisis in future. In such a case, the federal government had a
strategy of reducing cases of taxpayer-funded bailouts. Besides, the act aims at establishing
better ways of protecting the consumers.
The Dodd-frank act had some players including; Security and Exchange Commission
(SEC), the Commodities Futures Trading Commission (CFTC), the Consumer Financial
Protection Bureau (CFPB) who developed hundreds of policies incorporated in the Act (Skeel,
2010). The policies contributed to the reduction of risky consequences characterized in the
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previous years in our financial system. The Dodd-frank act took faced different opinions in the
light of the 2016 general election in America. The Democrats, headed by Hillary Clinton
repeatedly argued on what need to be done to reduce the financial risk. Clinton proposed a
targeted compilation of reforms with intentions of mitigating risks in the “shadow banking”
sector (Act & Protection 2010). However, according to the Republicans, they argued that some
policies that were alleged to hurting smaller banks and the entire economic freedom and vibrancy
should be abolished. They proposed the re-introduction of Glass-Steagall and raising of the
capital standard.
The Dodd-frank act has six major components that aim at changing the country’s
financial system. The components include:
I. The Volcker Rule
II. The Consumer Financial Protection Bureau
III. The Financial Stability Oversight Council (FSOC) and designations
IV. Derivative Regulations
V. Too Big to Fail and Living Wills
VI. Capital and Liquidity Requirements
The Volcker Rule
The Volcker rule has a primary intention of monitoring and foreseeing that commercial
banks don’t engage in speculative and gambling business with the aim of raising their profit
margin. Specifically, it limits the banks from investing in private equity funds. This policy was
enacted after commercial banks in America engaged in proprietary trading resulting in the 2008
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financial crisis. A massive loss was registered as a consequence of the bank’s misconduct. The
depositor’s funds and taxpayers dollars were put at risk. In such a case, the Volcker rule was
brought in place to monitor the activities of the commercial banks thus keeping depositors’
finances safe. The Volcker Rule was finalized in April 2014, and the commercial banks were
expected to comply with the rule by July 2015.
The Consumer Financial Protection Bureau (CFPB).
It was launched on 11th July 2011 as an independent financial regulator to monitor and
control money markets. The body has a responsibility of foreseeing activities under mortgages,
student’s loans, credit cards and capital markets (Skeel, 2010). In that regard, the body has
powers to change policies, supervise financial companies directly and enforce laws protecting
consumers by punishing the defaulters and taken other relevant actions to them. The body was
created since no single monetary authority had a primary role in preventing violation of
consumer’s rights or mischievous acts toward customers in the financial markets (Acharya et al.,
2010). Besides, the CFPB plays a fundamental role in educating the consumers on financial
issues and empowering them. They enable the consumers to be masters of their finances and help
them understand their investment trajectories. Senator Elizabeth Warren developed the agency.
Capital and Liquidity Requirements
Before the financial crisis, most pf the huge financial institutions had a leverage ratio of
approximately 50:1 (Skeel, 2010). That implies that in store one dollar in capital to match the 50
dollars they had in liabilities. By the time of financial crisis, the value of mortgage-related assets
started declining. The firm’s balance sheets were scraped off, and the Federal Reserve had no
otherwise but to intervene and recapitalize the companies. In such a case, there was a need to
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develop a policy that would ensure that commercial banks remain afloat longer in case such a
crisis happens again (Acharya et al., 2010. There would be no essence for government bailouts to
rescue the firms. As a result, the Federal Reserve enacted new policies for the amount of capital
dictating that financial institutions should hold up to 9.5% of their assets in liquid capital (Skeel,
2010). Liquid capital is those assets that can be easily converted into cash. This liquid capital
included government bonds and other assets that were defined to having minimal risk profile. As
a result of this rule, all large financial firms are expected to meet the new capital standards
requirements by 2019. It implies that all large financial institutions will have a leverage ratio of
10:1.
The Financial Stability Oversight Council (FSOC) and designations.
