RegTech Intelligence 
JWG analysis.
On 21 July 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank for short) into law. Since its inception, the number of pages of Dodd-Frank related rules has risen to 22,296, representing over a 550% increase on the 4,049 pages released in the first year.
It may have been viewed as a landmark financial regulation when passed but, according to poll data released by the American Enterprise Institute, when sample groups were asked, “How familiar are you with the Dodd-Frank law which regulates financial markets?”, 39% said they had never heard of the regulatory act, and only 4% were familiar with the legislation.
What has Dodd-Frank achieved?
All that being said, we begin by wishing Dodd-Frank a happy birthday and discussing what it has accomplished in its infancy.
What Dodd-Frank has done particularly well, by gifting regulators with the ability to regulate financial firms regardless of their corporate form, has been to send a clear signal to the financial services industry that certain firms on the fringes would no longer be able to use operational loopholes.
To avoid another Lehman Brothers situation, the legislation has provided the government and regulators with the tools required to deal with failing firms in a financial crisis without either bailing them out or dealing with a chaotic bankruptcy. Furthermore, the largest firms face further requirements, such as increased capital limits and stress tests.
Increased market transparency has been another cornerstone of the Dodd-Frank Act. The reforms have comprehensively regulated the derivatives markets by moving the market towards central clearing and exchange trading and shedding some light on the shadow banking sector.
For added supervision and oversight of firms, the Financial Stability Oversight Council was established and, alongside the Office of Financial Research, provides the government with an ability to see across the entire financial market. The Consumer Financial Protection Bureau, which has a broad authority over the consumer financial marketplace, has also been created to strengthen consumer and investor protection.
Overall there tends to be an agreement that the American financial system is now stronger and better able to withstand future crises. However, an aggressive campaign currently underway in Congress to repeal the landmark financial regulation shows it has not been welcomed with open arms.
Where has Dodd-Frank failed?
According to Davis Polk, over the past five years, roughly 40% of the proposed 390 rules are yet to be finalised. For this reason, Dodd-Frank remains a work in progress and, whilst the pace of rulemaking crawls, industry spending on lobbyists continues to grow.
In total, since 2010, the financial services industry has spent $2.5 billion on lobbying alone. Further research by the Center for Responsive Politics reveals that, in 2014 alone, financial companies and other interested parties spent nearly half a billion dollars on lobbyists to try to steer the rulemaking process in their favour. The biggest spenders included:
- Insurance companies: $151 million
- Securities and investment firms: $100 million
- Real estate companies: $96 million
- Commercial banks: $61 million.
But Dodd-Frank has been seen as a failure in one of its most fundamental goals – to prevent the need for another government bailout of giant banks deemed ‘too big to fail’. The Act requires big banks, who are deemed to pose a systemic risk, to come up with their own plans, also known as ‘living wills’, to wind down operations without taxpayer support. In response to these new legislations, eleven of the largest banks have already submitted three rounds of proposed versions of these wills to the regulators, however none of them have been deemed credible so far.
There have also been concerns that some portions of the Act have gone too far. As a result, the law of unintended consequences has come into play by placing undue burdens on parts of the financial services industry. More specifically, tighter restrictions have reduced the amount of liquidity in the bond market and smaller community banks have raised concerns of facing an unfair disadvantage after being caught within a regulatory net designed for global industry giants.
What does the future hold for Dodd-Frank?
Congress is currently debating a series of efforts to amend or repeal portions of the law – over 20% of which call for the whole of Dodd-Frank to be retracted. In May 2015, the Senate Banking Committee approved a bill that proposed the largest overhaul of the Act since the law was passed. This bill meant that more institutions would escape the strong regulations, tougher supervision for capital standards and being held to more conservative balance sheets.
The statistics speak for themselves and, with a fifth of the required rules not even being proposed yet, there is still a lot work to be done. Another worry is that, the further we move away from the events that caused the crisis, which subsequently resulted in the birth of Dodd-Frank, the less urgency there is to push forward with the legislation or fight those who wish to overturn the Act altogether.