Dodd Frank is repealed

The Dodd-Frank Act on the test bench

At the beginning of February 2017, US President Donald Trump signed a decree stipulating that the necessity of individual regulations for the financial system be reviewed - one of the promises he made during the election campaign.1 In detail, it concerns the review of the Dodd-Frank Act, which was implemented in the wake of the financial crisis 2007 to 2009 was developed and adopted. The aim of the Dodd-Frank Act is to promote financial stability in the USA, to improve transparency in the financial system, to intensify the accountability of financial institutions, to limit systemic risks caused by a "too big to fail", taxpayers from bailouts and to protect consumers from abusive practices by financial services providers.2 The review of the Dodd-Frank Act aims to show whether the regulations are in line with the core principles proclaimed by the Trump administration. These include: 3

  • Help US citizens make financial decisions, save for retirement, and build personal wealth;
  • Prevent tax-funded bailouts;
  • promote economic growth and regulate financial markets in such a way that they are less susceptible to systemic risk and market failure due to moral hazard or information asymmetries;
  • improve the international competitiveness of US companies;
  • to emphasize the interests of the USA more strongly in international negotiations on financial market regulation;
  • Make regulatory provisions efficient, effective and appropriate as well
  • improve the structure of regulators and ensure public accountability.

The Dodd-Frank Act review is being carried out by the Treasury Department together with members of the Financial Stability Oversight Council (FSOC), which was established as part of the regulatory reform, and is expected to be completed within 120 days. The panel of experts is required to submit proposals with the aim of changing regulatory provisions and thus further promoting the implementation of the core principles

The Dodd-Frank Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") is a federal act that introduced the most far-reaching regulatory reform of the US financial system since the 1930s. The bill is named after Christopher J. Dodd, then chairman of the Senate Committee on Banks, and Barney Frank, then chairman of the House Financial Services Committee, and was passed in July 2010. The Dodd-Frank Act comprises 16 chapters ("Titles") with 541 articles of law ("Sections") on originally 849 pages. In the course of various expansions, adjustments and revisions, the law has now grown to over 2,300 pages. 5 Further adjustments are still pending.

The trigger for the passing of the Dodd-Frank Act was the financial crisis from 2007 to 2009, which originated in the USA and caused a conflagration worldwide.6 In the course of the crisis, calls for a revision of the existing regulatory systems were raised.7 With the Dodd-Frank Act, the areas identified as problematic in the course of the financial crisis are to be covered. In particular, the following five reform proposals were taken into account when drafting the law: 8

  1. Promoting effective financial supervision;
  2. Expansion of comprehensive regulation of the financial markets;
  3. Protecting consumers and investors from abusive practices by financial service providers;
  4. Providing the government with the necessary “tools” to respond effectively to future financial crises;
  5. Tightening international regulatory standards and improving international cooperation.

On the advice of President Obama in January 2010, the proposals were supplemented by the Volcker rule on proprietary trading by banks - this is one of the most important regulations in the Dodd-Frank Act.9 Table 1 provides an overview of the content of the Dodd-Frank Act , which can be roughly divided into the following four subject areas: 10

  1. Reform of the institutional regulatory and supervisory framework,
  2. Regulation of banks / financial institutions,
  3. Investor protection measures,
  4. Consumer protection measures. 11
Table 1
Chapter of the Dodd-Frank Act
Title I.Financial Stability
Title IIBank resolution (Orderly Liquidation Authority)
Title IIITransfer of Powers to the Comptroller of the Currency, the Corporation, and the Board of Governors
Title IVRegulation of Advisers to Hedge Funds and Others
Title VInsurance
Title VIRegulation of Credit Institutions (Improvements to Regulation of Bank and Savings Association Holding Companies and Depository Institutions)

Title VIIWall Street Transparency and Accountability
Title VIIIPayment transactions, securities settlement and settlement (payment, clearing, and settlement supervision)
Title IXInvestor Protections and Improvements to the Regulation of Securities
Title XBureau of Consumer Financial Protection
Title XIFederal Reserve System Provisions
Title XIIImproving Access to Mainstream Financial Institutions
Title XIIIPay It Back Act
Title XIVMortgage Reform and Anti-Predatory Lending Act
Title XVMiscellaneous Provisions
Title XVISection 1256 Contracts

Reform of the institutional regulatory and supervisory framework

With the Financial Stability Oversight Council, a council was established to oversee the stability of the financial markets. The tasks of the FSOC include coordinating the activities of the federal financial market supervisory authorities as well as identifying risks to financial stability at an early stage and reacting to them in good time. It is also intended to help promote market discipline so that financial market players do not - as they did during the financial crisis from 2007 to 2009 - again expect state rescue measures at the expense of taxpayers. The FSOC is run by the Treasury Department and is staffed with representatives from the Federal Reserve (Fed), the Federal Deposit Insurance Corporation (FDIC), and other regulatory agencies created as part of the reform.

The task of the Orderly Liquidation Authority (OLA) includes creating a suitable framework for the orderly liquidation of systemically important banks in the event of insolvency. This includes placing the banks under compulsory administration if this is deemed necessary to avert a threat to the stability of the financial system, or using so-called bail-ins. The aim is to protect consumers, provide fewer incentives for rescue measures and reduce the risk of moral hazard for management, shareholders and unsecured creditors. It is envisaged that the costs of winding up insolvent banks will be borne by the financial sector through the collection of a levy. 12

In addition, the Dodd-Frank Act provides for the abolition of the Office of Thrift Supervision (OTS), an authority that was accused of too lax handling of the regulatory provisions in the course of the financial crisis.13 Instead, the tasks of the OTS are transferred to the Office of the Comptroller of the Currency (OCC), the FDIC, the Federal Reserve Board of Governors and the Consumer Financial Protection Bureau (CFPB). With the creation of the Securities and Exchange Commission (SEC), supervision of asset managers of investment funds not approved for public sale in the USA (e.g. hedge funds, private equity funds, etc.) was established. Together with the Commodities Futures Trading Commission (CFTC), the SEC is to develop new standards for swap traders. Further regulations and interventions in the financial market structure concern the more intensive supervision of subsidiaries that do not have a banking license, as well as the limitation of risks from derivatives and securities lending transactions.

Regulation of banks / financial institutions

Under the Dodd-Frank Act, the rule named after Paul Volcker, the former chairman of the Federal Reserve, represents the most significant innovation. The Volcker rule aims to prohibit banks from doing speculative transactions that have proven to be particularly risky . Henceforth it was forbidden to conduct proprietary trading in securities in order to benefit from short-term price movements. However, trading in bonds issued by public institutions, trading on behalf of customers and activities for the purposes of market making and the protection of financial risks, such as underwriting or hedging, are excluded. It was also prohibited from now on to participate in, own or finance hedge funds and private equity funds. 14

The Volcker rule was officially introduced on July 21, 2015.15 Its implementation means a partial reversal of the Gramm-Leach-Bliley Act of 1999, which repealed the segregated banking system, which was originally regulated by the Glass-Steagall Act of 1933 going back. With the unwinding, the Glass-Steagall Act experienced a kind of renaissance, but that doesn't mean that it was completely revived, even if investment banks like Goldman Sachs have turned back into commercial banks.

The Dodd-Frank Act also provides for higher requirements for banks with regard to capital backing for risk-weighted assets. The capital base is only considered to be sufficient when, as shown in Table 2, a core capital ratio (Tier 1) of 4.5%, a total capital ratio of 8% and a maximum leverage ratio of 4% have been achieved. Transitional periods are sometimes provided for the adjustment to the minimum capital adequacy standards. In addition, the banks must hold a minimum level of liquidity, i.e. meet a minimum liquidity coverage ratio (LCR). This is intended to reduce the risk of a bank becoming insolvent: a liquidity buffer of highly liquid funds must be kept ready. This must be sufficient to offset the forecast net outflow of liquidity and asset impairments for 30 calendar days in the event of a stress scenario.

Table 2
Transitional provisions of the new regulations
Maximum leverage ratio4,04,04,04,04,0
Minimum requirement for Tier 1 Common Equity Tier 14,54,54,54,54,5
Capital conservation cushion0,6251,251,8752,5
Minimum requirement for hard core capital Tier 1 plus capital conservation cushion4,55,1255,756,3757,0
Gradual increase in the deductions from Tier 1 Common Equity Tier 1 capital406080100100
Minimum requirement for core capital6,06,06,06,06,0
Minimum requirement for core capital plus capital conservation cushion6,6257,257,8758,5
Minimum requirement for total capital8,08,08,08,08,0
Minimum requirement for total capital plus capital conservation cushion8,6259,259,87510,5
Liquidity Coverage Ratio (LCR) - minimum standard8090100100100
Stable financing ratio (Net Stable Funding Ratio, NSFR)1001

1 Introduction as a minimum standard.

Sources: Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency: New Capital Rule - Community Bank Guide, Washington DC, July 2013, basel / files / capital_rule_community_bank_guide_20130709.pdf (23.2.2017); Board of Governors of the Federal Reserve System: Draft final rule to implement a liquidity coverage ratio requirement, Washington DC, August 29, 2014, -20140903.pdf (23.2.2017); Board of Governors of the Federal Reserve System: Notice of proposed rulemaking to implement a net stable funding ratio requirement for large banking organizations, Washington DC, April 25, 2016, -memo-20160503.pdf (23.2.2017).

The introduction of the stable net stable funding ratio (NSFR) is planned for 2018. The NSFR aims to increase the maturity congruence in banks' balance sheets. A minimum requirement is placed on the relationship between the risk-weighted long-term assets and the permanently stable forms of financing, whereby the latter deposits with longer contractual terms, own funds and longer-term bonds are expected. This is to prevent banks from predominantly financing their long-term assets with short-term liabilities, as was partially the case before the financial crisis. The risk of bankruptcy in stressful situations had increased as the possibility of taking on new short-term liabilities was limited. The minimum ratio should be 100%.

Investor protection measures

Before the onset of the financial crisis, the banks in the US obviously knew how problematic the loan claims were on their books. They therefore securitized the claims, for example in the form of asset-backed securities (ABS) or mortgage-backed securities (MBS) and sold them.16 But the buyers of these papers are also aware of the risk were, the papers were re-securitized and the so-called Collateralized Debt Obligations (CDOs) created, which were also sold. This game continued, so that there were papers that had up to 24 securitization levels.17 The result was that the buyers of these papers were increasingly networked through the acquisition, without this being revealed. The breeding ground for the devastating effects of contagion that fueled the extent of the financial crisis was laid. The Dodd-Frank Act took this into account by now having to retain 5% of the credit risk in securitisations. To minimize risk, the SEC can also issue individual regulations for individual products. The regulation also provides for greater protection for investors against unfair practices by rating agencies through stricter internal controls and stricter transparency requirements. The latter is due to the failure of the rating agencies, who often rated the securitized paper too well, which helped to hide the real risks.

Another part of the Dodd-Frank Act concerns the handling of hedge funds and private equity funds, so-called "shadow banks". From now on, shadow banks will be placed under the supervision of the Federal Reserve if the SEC considers them too large or risky. Shadow banks with capital in excess of US $ 150 million are regulated by the SEC. In order to provide better protection for investors, further regulations of the securities markets have also been implemented, including a reward system for informants in order to establish an incentive for reports of violations of regulations (so-called “whistleblowing”).

Consumer protection measures

With the creation of the CFPB, the responsibility for the enforcement of federal laws for consumer protection in the financial sector as well as the general protection of consumers in the financial markets were to be combined in a single authority. The agency's jurisdiction covers banks, credit unions, investment firms, mortgage lenders, and other financial institutions operating in the United States. In addition, new consumer protection rules have been introduced, primarily focusing on the mortgage credit market. In the future, creditors should check more carefully whether debtors are able to repay their loans. In addition, the requirements for the information obligation of creditors when dealing with debtors are increased, early repayment penalties are prohibited and the penalties for irresponsible loan commitments are tightened. 18

The deposit insurance has been increased from US $ 100,000 to US $ 250,000.19 In addition, the regulations governing the insurance industry have been revised. With the Federal Insurance Office (FIO), an authority for the supervision of certain insurance companies has been created. The FIO's powers include, among other things, recommending that the FSOC place insurance under the supervision of the central bank.

Critical point of view

The Trump administration has warned that bank lending would be restricted by the Dodd-Frank Act. It was therefore compelled to examine whether various regulatory provisions are necessary. She is not alone with her criticism of the Dodd-Frank Act. Whalen emphasizes that the goal of the Dodd-Frank Act of preventing future crises in the financial sector can only be achieved by accepting massive losses in economic growth, 20 because the Dodd-Frank Act is linked to overregulation. In an attempt to get a grip on all potential undesirable developments in the financial system as possible, regulatory provisions have been passed that are too restrictive in their entirety.The Dodd-Frank Act actually appears to be quite ambitious compared to previous financial sector reform laws. Figure 1 (left) suggests that the scope of the regulatory provisions, measured in terms of the number of pages, has historically stood out.

illustration 1
Scope of the Dodd-Frank Act and results of a survey on the competence of regulators

Note: Survey from July 21, 2010.

Source: EJ Kane: Missing elements in US financial reform: A Kübler-Ross interpretation of the inadequacy of the Dodd-Frank Act, in: Journal of Banking and Finance, Volume 36 (2012), no.3, p. 655 -656.

Kane points out that the legislature's competence is also limited. Its failure to assess all possible eventualities could possibly be the cause of an undesirable development in the financial sector.21 The consequence is that regulatory provisions are being enacted that do not work as intended or can themselves be a source of future undesirable developments, since they provoke evasive reactions, which were not originally foreseen.22 There are also doubts as to whether the authority of the regulatory authority is sufficient in the specific implementation of existing regulatory provisions. The results of a survey that reflected an assessment of the chances of success with regard to the implementation of regulatory provisions are summarized in Figure 1 (right-hand side).

The banks did not restrict their lending after the introduction of the Dodd-Frank Act: The sum of loans to domestic companies increased from around US $ 1.0 trillion to US $ 1.7 trillion between 2010 and 2016. However, Figure 2 shows that the growth rate of loans has been falling noticeably since the end of 2015.

Figure 2
Domestic Business Loans
Annual rate of change in%

Source: Thomsen Reuters Datastream.

The extent to which the decline in dynamism is related to the reforms of the Dodd-Frank Act (e.g. with the implementation of the Volcker Rule) cannot be clarified beyond doubt, since declining credit demand can also be an explanation. However, the results of the Senior Loan Officer Opinion Survey on Bank Lending Practices (SOSLP), a quarterly survey conducted by the Federal Reserve among US bank loan officers, suggest that loan terms have tightened since late 2015. Figure 3 shows that various categories of lending are affected by the tightening of lending conditions, including, in addition to loans to domestic non-financial companies, above all loans for commercial real estate. The survey also shows that the willingness to lower the spread, as measured by the balance of the responses to the spreads between the interest on loans for domestic companies and the refinancing cost rate, has gradually decreased. Overall, this development indicates that the slowdown in lending dynamics can also be attributed to supply-side effects.

Figure 3
Surveys of US bank loan officers
Balance of the answers to tightened credit conditions

Against this background, criticism of the Dodd-Frank Act is also made because the regulation affects small banks in particular, whose competitive position is likely to deteriorate due to stricter regulatory provisions due to rising costs.23 The increase in the associated costs is based on both poorer refinancing conditions and on the increased administrative effort that is necessary to meet the regulatory requirements. The result is that small banks are offering loans on less attractive terms. The latter, in turn, is likely to affect small businesses in particular, which rely on these loans for borrowing. In fact, the dynamism of loans to domestic companies that were granted by small banks has declined comparatively sharply (see Figure 2).

It is also viewed critically that the Dodd-Frank Act is intensively devoted to regulating banks, but does not do so to the same extent for shadow banks - a significant source of instability in the financial sector during the financial crisis.24 This requires further regulations. The Volcker rule has also come under fire because, due to its complexity, there is still no final clarity about which transactions are allowed and which are prohibited by the regulation of exceptions. In addition, it is feared that certain business activities could be outsourced to the area of ​​the less intensely regulated non-banks.25

Finally, a weak point of the Dodd-Frank Act is seen in the large number of newly established regulatory authorities whose area of ​​responsibility is officially defined, but this cannot rule out the possibility of overlapping competencies or inefficiencies in regulation. 26 Against this background, the Monitoring of insurance companies by the Federal Reserve criticized, for example, because it lacks the expertise to do so. It also shows that the proposed way of commissioning various authorities to jointly draft regulations for regulation is hardly effective due to conflicts of interest and a lack of consultation. Five different authorities (CFTC, FDIC, FRB, OCC and SEC) were commissioned to submit a corresponding regulation to implement the Volcker rule. However, the authorities missed the deadline for submission by two years, so with the introduction of the Volcker Rule in July 2015, the original deadline for implementation was exceeded by three years

Neiman and Olsen have drafted recommendations for a reform of the organization of the regulatory authorities, which should help to increase their effectiveness (see Figure 4) .28 Their proposal aims to ensure that one regulatory authority should be responsible for each of the four regulatory areas.

Figure 4
Regulatory structure and reform proposal

CFPB: Consumer Financial Protection Bureau; CFTC: Commodity Futures Trading Commission; CMA: Capital Markets Authority; FDIC: Federal Deposit Insurance Corporation; Fed: Federal Reserve; FIR: Financial Insurance Regulator; OCC: Office of the Comptroller of the Currency; OTS: Office of Thrift Supervision; PRA: Prudential Regulatory Authority; SEC: Securities and Exchange Commission.

Source: RH Neiman, M. Olson: Dodd-Frank's Missed Opportunity: A Road Map for a More Effective Regulatory Architecture, Bipartisan Policy Center, Washington DC, 2014, 12 / BPC-FRRI-Dodd-Franks-Missed-Opportunity-April-2014.pdf # page = 60 (24.2.2017), pp. 49-50.

Closing remarks

The Dodd-Frank Act represents the most comprehensive regulatory reform of the US financial system that has been made since the 1930s. The aim of the law is to promote financial stability in the USA, improve transparency in the financial system, increase the accountability of financial institutions, limit systemic risks caused by "too big to fail", protect taxpayers from bailouts and the Protecting consumers from abusive practices by financial service providers. At the same time, the Dodd-Frank Act also gives cause for criticism because possible overregulation can lead to a loss of economic growth, small banks are disadvantaged by a loss of competitiveness and access to credit is made more difficult for small businesses and households. In addition, overregulation can create a confusion of competencies among individual regulatory authorities. Against this background, the Trump administration has decided to review the Dodd-Frank Act to determine whether it is in line with its core principles for regulating the financial markets.

The review of the law is currently underway. It remains to be seen which solutions will be sought to improve regulation. Possible areas for this would be to soften the regulations for small banks so that the costs of regulation are not disproportionately high for them, to regulate shadow banks more closely and to reduce the complexity of the Volcker rule. The structure of the regulatory authorities would have to be revised in such a way that they function effectively due to the low overlapping of competencies.

  • 1 See The White House: Presidential Executive Order on Core Principles for Regulating the United States Financial System, Washington DC, 3.2.2017, presidential-executive-order-core-principles-regulating-united-states (23.2.2017).
  • 2 Literally it says in the preamble: “An Act to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end 'too big to fail', to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes. "See Dodd-Frank Wall Street Reform and Consumer Protection Act, HR 4173, Public Law 111-203-July 21, Washington DC, July 21, 2010, (February 23, 2017) .
  • 3 See The White House, op.
  • 4 See also Belke and Burghof, who critically discuss the relationship between the US administration and the Fed and discuss the possible consequences of deregulating the banking sector. See A. Belke, H.-P. Burghof: Banking supervision and monetary policy with Trump: Turn around 180 degrees ?, in: Wirtschaftsdienst, 97th Jg. (2017), H. 3, S. 172-179.
  • 5 Cf. Davis Polk: Dodd-Frank Progress Report, (23.2.2017) for an overview of the chronological sequence of individual measures and decisions.
  • 6 Cf. H.-W. Sense: casino capitalism. How the financial crisis came about and what to do now, Econ, Berlin 2009, for a detailed description of the causes of the financial crisis and its consequences.
  • 7 See J. Calmes: Both Sides of the Aisle See More Regulation, in: New York Times, October 13, 2008, https: // (February 23, 2017).
  • 8 See Department of the Treasury: Financial Regulatory Reform. A New Foundation: Rebuilding Financial Supervision and Regulation, Washington DC 2009, (23.2.2017).
  • 9 See The White House: Remarks by the President on Financial Reform, Washington DC, January 21, 2010, (February 23, 2017) .
  • 10 Cf. S. Kern: US financial market reform. Die Ökonomie des Dodd-Frank Act, EU-Monitor, DB Research, Finanzmarkt Spezial, No. 77, 2010, p. 5.
  • 11 In addition, the Dodd-Frank Act contains a regulation through which the financing of ethically questionable raw material extraction methods in developing countries is to be prevented. However, this is not discussed further in this article.
  • 12 See also S. Kern, op. Cit., P. 6.
  • 13 In fact, in the course of the financial crisis, the OTS was accused of a so-called “regulatory capture”, a kind of state failure that manifests itself in the fact that a state authority makes decisions contrary to the interests of the public. See, for example, R. Cyran: The Downfall of a Regulator, in: New York Times of April 8, 2009, (February 27, 2017).
  • 14 For details see Department of the Treasury: Prohibitions and Restrictions on Proprietary Trading and Certain Interests In, and Relationships With, Hedge Funds and Private Equity Funds, Washington DC 2014, 2013 / bhca-1.pdf (February 25, 2017). Exceptions are also provided for participation in hedge funds and private equity funds, their ownership or financing.
  • 15 See B. McLannahan: Old engine of Wall Street is sputtering, in: Financial Times of October 2, 2015, (February 23, 2017) .
  • Due to the amendment to the Community Reinvestment Act under Clinton, 16 banks also had to grant loans to customers with poor credit ratings. In this way it became possible for even the unemployed to buy houses with credit. The aim of the Community Reinvestment Act, which was introduced under President Carter in 1977, was to counter the neglect of residential areas.
  • 17 Cf. H.-W. Sinn, op. Cit., P. 138.
  • 18 See S. Kern, op. Cit., P. 8.
  • 19 See Federal Deposit Insurance Corporation: Basic FDIC Insurance Coverage Permanently Increased to $ 250,000 Per Depositor, press release of July 21, 2010, (February 23, 2017 ).
  • 20 Cf. R. C. Whalen: Dodd-Frank and the Great Debate: Regulation vs. Growth, in: Networks Financial Institute Policy Brief, No. 2014-PB-01 (2014), p. 2.
  • 21 Cf. EJ Kane: Missing elements in US financial reform: A Kübler-Ross interpretation of the inadequacy of the Dodd-Frank Act, in: Journal of Banking and Finance, Vol. 36 (2012), no. 3, p. 655.
  • 22 Ibid.
  • 23 See J. Disalvo, R. Johnston: How Dodd-Frank Affects Small Bank Costs, in: Banking Trends: First Quarter, Federal Reserve Bank of Philadelphia Research Department, 2016, pp. 14-19.
  • 24 See E. J. Kane, loc. Cit., Pp. 655 ff.
  • 25 Cf. M. N. Baily, J. Schardin, P. L. Swagel: Did Policymakers get post-crisis Financial Regulation Right? Bipartisan Policy Center, September 2016.
  • 26 Cf. MN Baily, A. Klein, J. Schardin: The Impact of the Dodd-Frank Act on Financial Stability and Economic Growth, The Russel Sage Foundation Journal of the Social Sciences, 3rd year (2017), no. 1 , Pp. 20-47, (24.2.2017), p. 38.
  • 27 Cf. RH Neiman, M. Olson: Dodd-Frank's Missed Opportunity: A Road Map for a More Effective Regulatory Architecture, Bipartisan Policy Center, Washington DC 2014, 12 / BPC-FRRI-Dodd-Franks-Missed-Opportunity-April-2014.pdf # page = 60 (24.2.2017), p. 39.
  • 28 Ibid, pp. 44-50.

Title: The Dodd-Frank Act in Light of Recent Criticism

Abstract: In February 2017, newly elected U.S. president Donald Trump released a presidential executive order on core principles for regulating the United States financial system. Basically, the order seeks to compare how existing regulation imposed by the Dodd-Frank Act corresponds with the core principles that include the promotion of financial stability by improving accountability and transparency in the financial system, the end of “too big to fail”, the protection of the American taxpayer by ending bailouts and consumers from abusive financial services practices. This article presents an overview of important regulations imposed by the Dodd-Frank Act and discusses the criticism on some of the regulations.

JEL Classification: G21, G28