In wake of 2007–08 financial crisis, Dodd-Frank changed the game

There’s a lot from the mid- to late-2000s that invites feelings of nostalgia.

Seth Rogen and his troupe dominated the comedy scene with hits like Knocked Up, Superbad, and Pineapple Express. Warped Tour was at its zenith. Eli Manning and the Giants gave NFL fans the Helmet Catch in Super Bowl XLII. The 2007–08 global financial crisis and ensuing Great Recession gave an entire generation lasting economic anxiety…wait a minute.

A core memory needn’t be cheerful to be consequential. Indeed, the financial crisis consequently led to passage of the Dodd-Frank Act, an overhaul of the US financial sector “on a scale not seen since the reforms that followed the Great Depression,” as then-President Barack Obama described it.

The Dodd-Frank Act was lawmakers’ response to “the shadow banking system at the time,” according to Mark Nelson, senior legal analyst at Wolters Kluwer, and they passed it in 2010.

That shadow banking system included “the largely unregulated businesses that were getting blamed for [the crisis],” such as mortgage lenders, Nelson told CFO Brew. “And I think the Dodd-Frank Act, it addresses those issues mostly in the banking provisions, like bank capital, bank stress testing, and things like that. But it also pulled in a lot of other topics that may or may not have been directly responsible for the financial crisis,” including hedge funds.

Dodd-Frank still plays a central role in public discourse 15 years later, though its future is uncertain in a Trump administration focused on deregulation. Before we go there, let’s examine all the ways it impacted banking and, more generally, corporate America.

Reading material. A breezy read that spans 2,300 pages, Dodd-Frank introduced 400 new regulations on Wall Street.

Fortunately, Mayra Rodríguez Valladares, a financial risk consultant and trainer, helped us summarize what the law did in far fewer words. She said Dodd-Frank had five main objectives:

1. It created new agencies such as the Consumer Financial Protection Bureau (CFPB), which Rodríguez Valladares said was a “dramatic change in how institutions were regulated” by centralizing the role of consumer watchdog against predatory lending and similar “miscreants.” Nelson at Wolters Kluwer also name-dropped the Financial Stability Oversight Council (FSOC), which “was a new creation to look at systemic risk” in the financial sector.
2. By creating this plethora of new financial regulations, Dodd-Frank reminded the public that “banks can get into trouble” and there’s never a guarantee they’ll always remain open, Rodríguez Valladares said.
3. The law also created the Volcker Rule, which bans proprietary trading or speculation by banking institutions. As a bank, “you have to go through a fair amount of documentation to show to your risk managers and to the bank regulators, why exactly are you holding these stocks, why are you holding these bonds, why are you doing these derivatives,” she said. “And banks don’t like it.”
4. It created regulations for derivatives. Before Dodd-Frank, only derivatives that were traded on exchanges such as the Chicago Mercantile Exchange were subject to regulations, Rodríguez Valladares said. Over-the-counter derivatives such as interest-rate derivatives were not. “Transparency is key,” she said. “When different players know how much is outstanding, how much is being traded, what the prices are, it is a much, much better market.”
5. Dodd-Frank added more requirements for banks such as “living wills” that, according to the Federal Reserve website, “must describe the company’s strategy for rapid and orderly resolution in the event of material financial distress or failure of the company.”

Not everyone was happy with all this new red tape. Dodd-Frank had its critics, including Republican politicians. The law got through Congress largely because of Democratic support. Three Republican senators voted for Dodd-Frank, which was just enough to avoid a filibuster.

The GOP-controlled House Financial Services Committee website states that “Dodd-Frank reaches far beyond Wall Street and does not address the real causes of the crisis,” and former Rep. Randy Neugebauer (R-TX) once claimed that “it will take over 24 million man hours” annually to comply with just 224 of the law’s 400 regulations.

Rodríguez Valladares noted that large banks “fought…tooth and nail” against the Volcker Rule because of the added documentation it required, but “no, banks should not be casinos,” she said, “because they are holding your deposits…so they should not be speculating.”

It should be no surprise, then, to hear that Republican lawmakers put Dodd-Frank in their crosshairs in future Congressional sessions.

A shaky future. Republicans got their first crack at rolling back Dodd-Frank in 2018 during President Donald Trump’s first term.

Trump signed a law in May of that year that limited Dodd-Frank’s enhanced prudential standards to only the largest banks that had $250 billion or more in assets, among other things, according to Harvard Law School. How many banks were that big? Fewer than 10, the New York Times reported. The legislation had bipartisan support, which was really something in an era of intense polarization.

Nelson said he sees potentially more rollbacks of Dodd-Frank regulations during Trump 2.0.

“I don’t know if we’ll see legislation on this or not, but we’re certainly seeing the Trump administration look at some regulatory rollbacks, reconsidering some of the rules themselves,” he said, noting that agencies are able to modify or rescind rules. “I think we’re probably seeing another round of that in the near to mid term.”

We’ve already gotten a taste of what’s to come. Trump wasted little time in gutting the CFPB and other agencies in the first months of his term. He fired most of the CFPB’s workforce as his administration works to refocus the agency. Republican legislators also recently took initial steps to slash CFPB funding.

Nelson said how far leaders will roll back Dodd-Frank, and through what method, “is a big open question right now.” It could be open season on Dodd-Frank regulations with the Supreme Court’s recent scrapping of the Chevron deference, he added.

Rodríguez Valladares described Trump’s attempts to dismantle CFPB as “his first part of the agenda” to deregulate the finance sector. The agency is “the only national entity that is fully dedicated to protecting American consumers. So that really showed that protecting American consumers was not at the heart of what he intended to do,” she said. “The fact that he started out so aggressively tells me that there’s still more to come.”