2010 Bank Reform Bill

8 Ways the Bank Reform Bill Made You Safer

Aerial view of Manhattan, New York, USA
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On July 21, 2010, President Obama signed the Dodd-Frank bank reform bill. Senator Chris Dodd introduced it on March 15, 2010. The Senate passed it on May 20. It was approved by the House on June 30, after being revised by Congressman Barney Frank. Its purpose was to make another financial crisis less likely.

The bill took significant steps toward regulating non-bank financial companies, like hedge funds, and the most complicated derivatives, like credit default swaps.

It increased the Federal Reserve's authority to regulate the economy. It created the following new agencies and regulations.

1. Consumer Financial Protection Agency.

 The bill set up a Consumer Financial Protection Agency to be under the Federal Reserve. It streamlined government by focusing many different functions under one roof. It oversees credit and debit cards, consumer and payday loans, and credit reporting agencies - but not auto loans from dealers. It regulates the fees for those cards, as well as mortgage underwriting and bank fees. For mortgage-holders, it requires the documents be easy to understand. Banks can no longer lend without making sure borrowers are employed, have a legitimate income, and have good credit.

2. Financial Stability Oversight Council.

 The Council reviews systematic risks affecting the entire financial industry. Chaired by the Treasury Secretary, it has these other agencies: Consumer Financial Protection Agency, CFTC, Fed the, FDIC, FHFA, OCC, and SEC.

The Council oversees previously unregulated hedge funds and other quasi-bank companies. It can turn any "too-big-to-fail" companies over to the Fed, which could then legally require it to increase its reserve requirement, just like commercial banks.

3. Volcker Rule.

 The bill included a regulation known as the Volcker Rule.

It prohibits banks from profiting from derivatives through a hedge fund if it's for their company's profit. Banks can, however, use derivatives only if it profits their customers. The rule was named after former Federal Reserve Chairman Paul Volcker, who blamed lax regulations of the banks' use of derivatives for the financial crisis. Volcker suggested the regulations be added when he was Chair of President Obama's Economic Advisory Panel.

4. Improved Credit Rating Process for Derivatives.

 The Act included a measure which allows the SEC to recommend ways to revamp the credit rating industry. Credit rating agencies like Moody's and Standard & Poor's gave overly high ratings to derivative bundles, misleading investors until it was too late. This was because the agencies were understaffed, didn't have enough data about the mortgage securities they were rating and were pressured to issue overly rosy ratings. It allows an investor to sue credit agencies and allows the SEC to fine these raters.

5. Derivatives Clearing House and Swaps Spin-Off.

 The bill required that credit default swaps and other derivatives be traded in a central clearinghouse and regulated by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).

Banks must spin off riskier commodity, equity and low-grade credit contracts into separate affiliates with higher capital costs. They may retain interest-rate, foreign exchange and high-quality credit swaps.

6. Clarify Bank Regulation.

 The Act clearly assigned which banks are regulated by which agency. This means banks can no longer choose the agency where they had the weakest regulation. It gave states the right to regulate banks, overriding Federal regulations if needed. It folded the Office of Thrift Supervision into the Comptroller of the Currency Office.

7. Audits the Fed.

 The bill allowed a one-time audit by the Government Accountability Office (GAO) of all actions taken by the Federal Reserve in response to the nation's financial crisis. The Fed must post on its website the banks that received any of the TARP funds or $2 trillion in Fed loans, but allows a two-year delay.

 The GAO can also audit the Fed's use of the discount window, but not the Fed's handling of the fed funds rate. This reduces the Fed's independence in setting monetary policy

Other Measures. Dodd-Frank ended TARP early, saving $11 billion. It increased banks' fees to the FDIC, adding $5.7 billion to cover the bill's costs. It created a new Federal Insurance Office under the Treasury Department, which identifies insurance companies (like AIG) that create risk to the entire system. It reduced executive pay by allowing shareholders a non-binding vote. It required hedge funds to register with the SEC, finally bringing these risky agencies under regulatory control.