8 Ways the Dodd-Frank Wall Street Reform Act Made You Safer

Frank and Dodd
U.S. Sen. Christopher Dodd (D-CT) (R) and Rep. Barney Frank (D-MA) (L) speak to the media after a meeting with President Barack Obama at the White House May 21, 2010 in Washington, DC.. Photo by Alex Wong/Getty Images


The Dodd-Frank Wall Street Reform Act was the most comprehensive financial reform since the Glass-Steagall Act. The Gramm-Leach-Bliley Act repealed Glass-Steagall in 1999. It allowed banks to use deregulated derivatives, causing the 2008 financial crisis. Dodd-Frank regulated the financial markets to make another economic crisis less likely. that's exactly what Glass-Steagall did after the 1929 stock market crash.

The Dodd-Frank Act was named after the two legislators who created it. Senator Chris Dodd introduced it on March 15, 2010, and ushered it through the Senate on May 20. The bill was revised by Congressman Barney Frank and approved by the House on June 30. On July 21, 2010, President Obama signed the Act into law. (Source: "Dodd-Frank Wall Street Reform Act," U.S. Senate. "Summary of Dodd-Frank Reform Act," Morrison & Forster.)

8 Ways Dodd-Frank Made Your World Safer

1. Oversee Wall Street: The Financial Stability Oversight Council looks out for risks that affect the entire financial industry. It also oversees non-bank financial firms like hedge funds. It will recommend that the Federal Reserve supervise any that gets too big. The Fed will ask it to increase its reserve requirement. This prevents another AIG from becoming too big to fail. The Council is chaired by the Treasury Secretary, and has nine members: the Fed, SEC, CFTC, OCC, FDIC, FHFA and the new CFPA.

2. Stop Banks from Gambling with Depositors' Money:  The Volcker Rule bans banks from using or owning hedge funds for the banks' own profit. That's because they'd often use their depositors' funds to do so. Banks can use hedge funds for their customers only. Determining which funds are for the banks' profits and which funds are for customers has been difficult.

Therefore, Dodd-Frank gave banks seven years to divest the funds. They can keep any funds if that are less than 3% of revenue. Banks lobbied hard against the rule, delaying its approval December 2013. It went into effect in April 2014, and they have until July 21, 2015, to implement it.

3. Regulate Risky Derivatives: Dodd-Frank required that the riskiest derivatives, like credit default swaps, be regulated by the Securities Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC). In this way, excessive risk-taking can be identified and brought to policy-makers' attention before a major crisis occurs. A clearinghouse, similar to the stock exchange, must be set up so these derivative trades can be transacted in public. However, Dodd-Frank left it up to the regulators to determine exactly the best way to put this into place, which led to a series of studies and international negotiations.

4. Bring Hedge Funds Trades Into the Light: One of the causes of the 2008 financial crisis was that, since hedge funds and other financial advisors weren't regulated, no one knew what they were investing in or how much was at stake.

That's why the Fed and other agencies thought the sub-prime mortgage crisis would be confined to the housing industry. For more, see What Caused the Sub-prime Mortgage Crisis?

To correct for that, Dodd-Frank says that hedge funds must register with the SEC and provide data about their trades and portfolios so the SEC can assess overall market risk. States are given more power to regulate investment advisers, since Dodd-Frank raises the asset threshold limit from $30 million to $100 million. By January 2013, 65 banks around the world had registered their derivatives business with the CFTC. (Source: "​Banks Face New Checks on Derivatives Trading," NYT Dealbook, January 3, 2013.)

5. Oversee Credit Rating Agencies: Dodd-Frank created an Office of Credit Ratings at the SEC to regulate credit ratings agencies like Moody's and Standard & Poor's. Many blame the agencies for over-rating some bundles of derivatives and mortgage-backed securities. This misleads investors who didn't realize the debt was in danger of not being repaid. The SEC can require agencies to submit their methodologies for review, and can deregister an agency that gives faulty ratings.

6. Regulate Credit Cards, Loans, and Mortgages:  The Consumer Financial Protection Bureau consolidated the functions of many different agencies. It oversees credit reporting agencies, credit and debit cards, as well as payday and consumer loans (but not auto loans from dealers). The CFPB regulates credit fees, including credit, debit, mortgage underwriting and bank fees. It protects homeowners in real estate transactions by requiring they understand risky mortgage loans. It also requires banks to verify borrower's income, credit history and job status. The CFPB is under the U.S. Treasury Department

7. Increase Supervision of Insurance Companies: It created a new Federal Insurance Office (FIO) under the Treasury Department, which identifies insurance companies like AIG that create a risk to the entire system. It also gathers information about the insurance industry and make sure affordable insurance is available to minorities and other underserved communities. It represents the U.S. on insurance policies in international affairs. The new office also works with the states to streamline regulation of surplus lines insurance and reinsurance. It was supposed to report to Congress the impact of the reinsurance reforms prescribed by the Nonadmitted and Reinsurance Reform Act of 2010 and release an update by January 1, 2015. (Source: "Federal Insurance Office Requests Public Comment On Scope of Global Reinsurance Market," CFT News, June 27, 2012.)

8. Reform the Federal Reserve: The Government Accountability Office (GAO) was allowed to audit the Fed's emergency loans during the financial crisis. It can review future emergency loans when needed. The Fed cannot make an emergency loan to a single entity, like Bear Stearns or AIG, without Treasury Department approval. (Although the Fed did work closely with Treasury during the crisis.) The Fed must make public the names of banks that received these loans or TARP funds.

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