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Dodd-Frank Financial Reform
After Two Years5 Successes and 5 Things That Will Make
Our Markets Stronger
Jennifer Erickson, Tamara Fucile, and David J. Lutton July 20, 2012
Introduction
Srong and sable capial markes are criical o Americas economic success. Te U.S.
nancial secor is he larges in he world and is one o he pillars o our economy. Bu
he 2008 nancial crisis also laid bare weaknesses in he secorweaknesses ha had
severe consequences or American workers and heir amilies. Millions o Americans
los heir jobs and $17 rillion in household wealh was desroyed.1 On a more personal
scale, he average ne worh or American households dropped rom $126,400 in 2007
o $77,300 in 2010 aer he nancial crisis,2 wiping ou almos wo decades o gains and
dramaically weakening he middle class ha is so crucial o economic growh.
wo years ago his week, in response o he nancial crisis, Congress passed landmarkreorm o srenghen he U.S. nancial secor and proec axpayers rom a repea o he
2008 crisis. Te Dodd-Frank Wall Sree Reorm and Consumer Proecion Ac was he
mos sweeping legislaive reorm in he nancial secor since he passage o Presiden
Franklin D. Roosevels suie o reorms in he 1930s. Bu passing Dodd-Frank hrough
Congress was simply he rs sep in a process o shoring up he nancial sysem ha con-
inues o his day, wih criical decisions sill o come in he monhs and years ahead, boh
o implemen his key law, and also o ensure he nancial secor is serving he economy.
Dodd-Frank gave regulaors key new ools and a mandae o do a dicul job. Par o he
challenge is echnical: o use hose ools, regulaors mus creae and implemen specic
rules designed o make markes saer, keep our companies compeiive, and proec U.S.
axpayers and consumers. Bu par o he challenge is also poliical: ensuring ha opponens
who have sough o weaken and delay key measures do no ulimaely shelve progress.
wo years aer Presiden Barack Obama signed Dodd-Frank ino law, we have seen
some noable successes. Our nancial markes are sronger han hey were beore he
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crisis, and Americans can coun on beter consumer nance proecion in heir day-o-
day ineracions wih nancial services insiuions.
Tis issue brie presens ve concree ways ha our nancial markes are sronger oday
han wo years ago alongside ve concree hings ha can be done o make hem even
sronger. Specically, here are ve ways nancial reorm has srenghened our markes:
A consumer wachdog is now on he bea. Every nancial insiuion now mus play by he rules. Increased capial requiremens are now in place.A new resoluion auhoriy or ailing nancial insiuions now exiss. New rules will help rein in execuive compensaion.
Ye we also know ha in any ask his big here is sill more o be done. While his is no
an exhausive lis, here are ve concree hings ha can be done o make our markes
even sronger:
Implemen he Volcker Rule o proec axpayers rom excessive risk-aking by nan-
cial insiuions. Finalize derivaives reorm o proec our markes rom overspeculaion in his
hundred-rillion-dollar marke. Ensure nancial regulaors have he resources o proec axpayers by adequaely und-
ing he Commodiy Fuures rading Commission. Hold he line on morgage originaion and securiizaion o proec homeowners,
invesors and axpayers. Coninue o ensure coordinaed global nancial reorm and srong inernaional mini-
mum capial sandards are enaced.
So les delve ino he deails o Dodd-Frank wo years on wih much sill o accomplish.
Five ways financial reform has strengthened our markets
A consumer watchdog is now on the beat
I we had had his agency six years ago, eigh years ago, we would no be in he mess we
are oday.
Elizabeth Warren, testifying before House Financial Services subcommittee,
March 16, 20113
Perhaps he mos visible and immediae resul o he Dodd-Frank Ac has been he esab-
lishmen o he Consumer Financial Proecion Bureau, which was creaed o proec con-
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size rom small eniies, such as payday lenders or check cashing oules, o massive oo big
o ail insiuions, such as Wall Sree invesmen banks and global insurance companies.
Wih he collapse o large nonbanks such as American Inernaional Group, Inc. and
Lehman Brohers, i became clear ha hese rms needed much beter regulaion o
keep hem rom dragging down he economy. Similarly, in he wake o he nancial
crisis i became abundanly clear ha some small morgage-nance brokerages wereabusing prudenial underwriing pracices and placing many homebuyers in expensive
and unsusainable loans.9
Dodd-Frank creaed he Financial Sabiliy Oversigh Council o monior sysemic risk
in he nancial sysem and coordinae several ederal nancial regulaors. Te council
is empowered o ideniy sysemically imporan bank and nonbank nancial insiu-
ions, he ailure o which migh pose a risk o he U.S. economy. Tese insiuions are
subjec o cenralized regulaory oversigh by he Federal Reserve, which is auhorized
o implemen checks including limis on he amoun o deb hey can carry, enhanced
capial sandards o boos he amoun o equiy capial hey hold, and resricions romcerain ype o risky aciviies.
Te Financial Sabiliy Oversigh Council issued is nal rule on sysemically imporan
nancial insiuions in April 2012.Nonbank nancial insiuions will be designaed
sysemically imporan i hey have oal asses o more han $50 billion and mee one
o ve hresholds relaing o credi deaul swaps, ousanding deb, derivaives, leverage
raio, and shor-erm deb.10 In July 2012, he council designaed eigh nancial clearing-
houses as sysemically imporan.11 Tese so-called nancial marke uiliies are he rs
phase; i is expeced ha anoher hree o our large nonbank nancial insiuions will
be designaed beore he end o 2012.12
In he area o consumer nancial producs, small nonbanks were also largely ouside o
srong regulaory scruiny. In January 2012 he Consumer Finance Proecion Bureau
ook over he supervision o smaller nonbank companies ha provide consumer nan-
cial producs or services, including morgage brokers and payday loan companies.13 By
requiring he bureau o examine nonbanks, Dodd-Frank helps ensure ha consumers
ge he bene o ederal consumer nancial laws on a consisen basis.
Increased capital requirements are now in place
Te longer I augh and wroe in he area o nancial regulaion, he more convinced I
became o he cenraliy o srong capial sandards o a sound nancial sysem.
Federal Reserve Governor Dan Tarullo, June 6, 2012 14
Capial requiremens are designed o decrease he probabiliy o a nancial insiuion
ailing by deermining he ype o capial hey need o hold in reserve. Generally, hese
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requiremens increase he use o equiy (socks) as a unding source or nancial rms,
so ha i a rm ges ino diculies i is he shareholders and no he axpayers ha pick
up he bill. Bu he 2008 nancial crisis exposed he inadequacy o exising capial regu-
laions as many nancial insiuions were vasly overleveraged and hereore unable o
wihsand nancial disress. When Lehman Brohers ailed, i had $1 in equiy or every
$30 i was borrowing.15
Dodd-Frank has no only direced regulaors o increase minimum-capial requiremens,
bu has also placed greaer emphasis on he ypes o capial ha qualiy. Bank holding
companies and nonbank nancial insiuions wih asses o a leas $50 billion are now
subjec o greaer regulaory oversigh by he Federal Reserve, which can impose addi-
ional capial requiremens on hese insiuions. Te Federal Reserve is in he process o
adoping rules, agreed a he global level, o urher raise capial over he coming years.
Dodd-Frank also mandaed he Federal Reserve o carry ou annual sress ess on all
banks wih $50 billion or more o deermine i hey have he capial needed o absorb
losses under various scenarios. Te Federal Reserve has carried ou hree sress ess soar, wih he laes resuls in March 2012 showing ha 15 o he 19 larges nancial rms
operaing in he Unied Saes have enough capial o wihsand a severe recession.16
Tis refeced a signican increase in capial since he 2009 es, when 10 o he banks
were ound o have insucien capial o wihsand anoher crisis.17
Increased capial requiremens and sress esing help make our nancial sysem more
resilien o economic shocks and uure nancial crises. Tis is criically imporan given
coninued nancial marke problems in Europe, which have creaed uncerainy and
volailiy in global markes.
A new resolution authority for failing financial institutions now exists
In summary, he measures auhorized under he Dodd-Frank Ac o creae a new, more eecive
SIFI [sysemically Imporan Financial insiuions] resoluion auhoriy will go ar oward
reducing leverage and risk-aking in our nancial sysem by subjecing every nancial insiuion,
no mater is size or degree o inerconnecedness, o he discipline o he markeplace.
Sheila C. Bair, former chair of the FDIC, testimony before the House Subcommittee
on Financial Institutions and Consumer Credit, May 26, 201118
Te collapse o Lehman Brohers and he near collapse o global insurer American
Inernaional Group and Wall Sree invesmen bank Bear Serns highlighed he need
or a resoluion process ha would allow he wind-down o sysemically imporan
nonbank nancial insiuions wihou he need or axpayer backed bailous. Te new
resoluion auhoriy rules mandaed in Dodd-Frank atemp o end his problem o oo
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big o ail and ensure U.S. axpayers will no longer be asked o bail ou ailing banks and
oher nondeposiary insiuions.
While he Federal Deposi Insurance Corporaion is radiionally in charge o winding
down ailing deposiory banks, oher nonbank nancial insiuions have been subjec o
he normal bankrupcy process. Bu bankrupcy is unsuiable or large nancial insiu-
ions ha are sysemically imporan or a variey o reasons, especially because bank-rupcy is no designed o keep credi fowing in he broader economy.
Dodd-Frank gives he Federal Deposi Insurance Corporaion auhoriy o wind down
bank holding companies and nonbank nancial insiuions whose ailure would be
poenially damaging o he U.S. economy and nancial sabiliy. Resoluion mehods
include selling asses and paying o deposiors as well as he ranser o deposis o
healhy banks. Under he process, managemen is red and shareholders bear he losses.
Anoher key ool is he requiremen or large banks and nonbank nancial insiuions
o do advance preparaion or ailure by submiting plans o regulaors. Tese so calledliving wills help prepare he insiuions and regulaors or a rapid and orderly wind-
down in he even o nancial disress.
Nine o he larges U.S. banks and he U.S. unis o oreign banks wih more han $50
billion in asses or more han $250 billion in nonbank asses, such as derivaives, sub-
mited heir plans o regulaors on July 2, 2012.19 Te Federal Reserve esimaes ha
124 insiuions, including dozens o oreign banks, will need o submi living wills by
he end o 2013.20 I regulaors believe ha he resoluion plans are no credible, Dodd-
Frank gives hem he auhoriy o make he banks sell o business lines and resrucure
o become less complex.21
Te graning o his resoluion auhoriy and he draing ocredible living wills provides increased visibiliy ino complex insiuions and helps
ensure ha corporaions have he abiliy o wind down, under he supervision o regula-
ors, in a way ha minimizes he damage o axpayers and he economy.
New rules will help rein in executive compensation
In he hal a dozen nancial insiuions ha needed help he mos during he crisis, ha were
oo big o ail he managers which led hem ino he rouble in all cases wen away very,
very wealhy.
Warren Buffett, March 25, 201122
Public anger over rapidly escalaing pay or corporae execuives, regardless o heir
rms perormance, led o he inclusion o several execuive compensaion provisions in
he Dodd-Frank Ac. Tese include requiring corporaions o repor he raio o CEO
o average worker pay and a measure o resric pay a banks so as no o encourage and
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reward excessive risk aking. Regulaors coninue o work hrough many o hese impor-
an rules, bu one noable provision already in aec is say-on-pay, which requires all
publicly raded companies o submi heir execuive compensaion plans o shareholder
voes a leas once every hree years.
While hese voes are non-binding, indusry analyss agree ha hey are already having
a signican impac on corporae compensaion pracices, as companies are aking hesevoes seriously.23 Alhough a very small number o companies (less han 2 percen) 24
have acually ailed heir say-on-pay voes since he acs implemenaion, rms have
begun resrucuring execuive compensaion packages o avoid embarrassing voes. Case
in poin: Aer is ailed voe in 2011, Hewlet-Packard Co. eliminaed is compensaion
ormula ha allowed he CEO o earn millions despie alling share prices.25
While shareholder disapprovals remain uncommon, he impac o say-on-pay voes and
he poenial negaive atenion ha accompanies hem has resuled in a shi in indusry
pracices ha or oo long allowed execuive compensaion o go unchecked.
Five things that will make markets stronger if we finish the job
Implement the Volcker Rule to protect taxpayers from excessive risk taking
by financial institutions
Banks beneing fom public suppor by means o access o he Federal Reserve and FDIC insur-
ance should no engage in essenially speculaive aciviy unrelaed o essenial bank services.
Five former secretaries of the Treasury: Michael Blumenthal, Nicholas Brady, PaulONeill, George Shultz and John Snow, in a letter to the Wall Street Journal, February
21, 201026
Te Volcker Rule, named aer ormer Federal Reserve Chairman Paul Volcker, prohibis
ederally insured banks and heir aliaes rom engaging in proprieary rading, dened
as when a bank buys and sells cerain invesmens or is own pro, insead o is cliens.
Proprieary rading can add signican risk o banks. Firs, i could pu a bank in a
confic o ineres wih cliens. In he years leading up o he 2008 nancial crisis, or
example, some banks sold producs o cliens while a he same ime heir prop desk
ook posiions on he opposie side o he same deal.
Second, i banks are rading wih heir own money hen hey run he risk o losing ha
money. I hese speculaive invesmens urn bad, and i he losses are subsanial enough,
hen he ederal governmenand he axpayermay have o sep in o bail ou he bank.
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In boh cases, proprieary rading creaes a culure o risk aking, which because o he
imporance o banks and oher sysemically signican nancial insiuions, pus he
enire nancial sysem a risk. JPMorgan Chase & Co.s recen mulibillion-dollar loss
highlighed he need or a srong Volcker Rule27one no weakened by proprieary
rading masked as hedging he banks overall risk .
During he Senae Banking Commitee hearing ino wha wen wrong a JP Morgan,Sen. Je Merkley (D-OR) poined ou: he basic concep o he Volcker rule is ha
banks are in he lending business, no he hedge und business.28 In May o his year,
Presiden Obama underlined he imporance o he Volcker Rule o ensure ha axpay-
ers are no again orced o bail ou a bank because o risky bes.29
Te nal Volcker Rule is due o be published in July 2012, hough i is likely he deadline
will be missed as regulaors work o ge he nal rule righ.30 Boh clariy and imeliness
are imporan in making sure ha he axpayers are proeced rom excessive risk.
Finalize derivatives reform to protect our markets from overspeculation in this
hundred-trillion-dollar market
Among he causes o he nancial crisis was Wall Srees use o exraordinarily complex
derivaivesnancial insrumens ha derive heir value fom oher nancial insrumens.
Tese derivaives were largely shielded fom scruiny in an opaque markeplace.
Sen. Carl Levin (D-MI) on Wall Street reform31
Derivaives are nancial insrumens whose value is derived rom some underlying secu-
riy or commodiy. Derivaives have exised or cenuries, and he uures and commodi-ies markes in, say, corn or pork bellies have been regulaed since he 1930s, bu he
rapid growh in oen complex and opaque derivaives led Warren Buet o amously
describe hem as nancial weapons o mass desrucion.32
Derivaives such as nancial uures, opions, and swaps involving ineres raes or credi
deauls were developed o allow invesors o hedge risks in nancial markesbu
quickly become a means o invesmen in heir own righ. Tis global marke grew rom
$88 rillion in 1999 o $684 rillion beore he crisis in 2008.33
Leading up o he 2008 crisis, large nancial insiuions bough and sold rillions o dol-
lars o over-he-couner swaps, meaning he rades were unregulaed and ouside he over-
sigh o regulaors. Alhough derivaives can play an imporan role allowing companies
such as airlines o manage risk, a lo o he rading amouned o litle more han speculaive
bes or prooen wih an inadequae level o capial o back up he rades.
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Reorming he derivaives marke became an imporan ocus o regulaory reorm aer
he 2008 nancial crisis because o he role derivaivescredi deaul swaps speci-
callyplayed in he ailure o American Inernaional Group, which required a bailou
cosing U.S. axpayers $182 billion.34 AIGs London aliae, AIG Financial Producs, sold
billions in swaps wihou having o place capial o back up hose bes. When he Briish
uni o AIG ailed in London, is U.S. paren had o be rescued by he U.S. axpayers.35
Dodd-Franks ile VII provisions signicanly increase he mandae o he Commodiy
Fuures rading Commission o bring greaer regulaory oversigh and ransparency
o derivaives. Te rules are deailed and highly echnical, hough broadly will have he
eec o requiring mos derivaives o be raded on a regulaed exchange and cleared
hrough a cenral clearinghouse. Tis means a counerparya clearinghouse whose
main purpose is sabiliywill sand beween he buyer and seller and guaranee ha
each pary is able o make good on heir obligaions by collecing a proporion o he
value conrac, known as a margin.
Te exchanges are regulaed by he Commodiy Fuures rading Commission, givinghe regulaor much more inormaion abou he marke and allowing hem o beter
monior, and preven, he ype o excessive risk aking ha ulimaely led o he AIG
bailou. Derivaives will in he uure be raded hrough ransparen plaorms wih real-
ime pricing inormaion. Tis should creae a more ecien and compeiive marke-
place, ensuring ha end-users including Main Sree businesses and local governmen
can access he bes prices.
Much progress has already been made, and recenly he Commodiy Fuures rading
Commission and Securiies and Exchange Commission, which regulaes equiy and deb
markes, issued a deniion o he ype o swaps ha will be subjec o cenralized clearingand exchange rading. Tis is a major milesone as a number o rules he commission has
already nalizedsuch as new posiion limis, regisraion, real-ime reporing, business
conduc, and commodiy opions ruleswill go ino eec in a mater o weeks, now ha
he deniion is nalized.36 Boh nancial regulaory agencies have made a commimen o
compleing he rulemaking on ile VII by he end o 2012.
Ensure regulators have the resources to protect taxpayers by adequately funding
the Commodity Futures Trading Commission
Te CFCs success in uncovering he ourageous manipulaion o he Libor, and he
consequen setlemen which will bring o he U.S. reasury hundreds o millions o dollars,
demonsraes he value o ha agency. Te reusal by Republicans o mee he Obama admin-
israions reques or $308 million or he CFC, when he agency has helped bring ino he
reasury approximaely ha amoun in one successul prosecuion, demonsraes ha he
pary is driven no by concern or he deci bu raher by ideological rigidiy.
Rep. Barney Frank (D-MA), June 29, 201237
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Laws need enorcers. o proec markes and consumers requires boh sound regula-
ions and adequae resources or regulaors o see hem hrough.
Some nancial regulaory agencies, such as he Federal Reserve, Comproller o he
Currency, and he Federal Insurance Deposi Corporaion are independenly unded,
insulaing hem rom atemps o cu heir budges o he poin where hey can no lon-
ger do heir jobs. Te Securiies and Exchange Commission is unded by a small user eeon all equiies rading.
Te Commodiy Fuures rading Commission, however, relies enirely on he con-
gressional appropriaions process, making i vulnerable o parisan atemps o sarve
i o resources as i works o ulll is enhanced responsibiliies under Dodd-Frank.
Te House Appropriaions Commitee has repored o he foor a bill ha provides
only $180 million o he derivaives regulaor. Tis represens a cu o $25 million (12
percen) rom las years appropriaion, and is 41 percen below he agencys requesed
budge o $308 million.38
Tis cu would require he commission o cu sang back o levels prevailing in he
mid-1990s. Ye since hen he combined impac o he growh in he uures marke
and he new responsibiliies under Dodd-Frank means ha he marke he agency now
overseas is 40 imes o 50 imes larger39 and a noional value o $300 rillion.40
Te Commodiy Fuures rading Commissions wo-year invesigaion ino Barclays
rigging o he London Inerbank Oered Rae, known as Libor, demonsraes he
coninued need o make sure here are enough cops on he bea o ideniy and punish
nancial misconduc. Te setlemen ne o $200 million is almos equivalen o he
agencys enire 2012 budge o $205 million.41
Presiden Obamas 2013 budge atemps o address some o he budgeary concerns
around Dodd-Frank implemenaion by unding he Commodiy Fuures rading
Commission in par hrough user ees.42 In a join leter o Congress, organized by he
public advocacy group Americans or Financial Reorm, more han 50 consumer, labor,
aih-based, nongovernmen, and business organizaions gave heir suppor o a user ee
unding model.43
Tis is a sound idea, and one wih preceden as seen in similar regulaory agencies.
Hold the line on mortgage origination and securitization to protect homeowners,
investors, and taxpayers
Tere were oo many people in all o he uncional componen parsmorgage brokers, loan
originaors, loan securiizers, sub-prime lenders, Wall Sree invesmen bankers, and raing
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agencies--who were ineresed only in making heir own as pros and were indieren o he
consequences o heir acions or homeowners and communiies, much less he naion as a whole.
Federal Reserve Governor Sarah Bloom-Raskin, February 11, 2011 44
Te misalignmen o incenives hroughou he housing and housing nance marke lies
a he hear o he morgage crisis. Brokers go paid a he closing able, leaving hem no
incenive o underwrie borrowers careully. Lenders quickly fipped hose loans inohe secondary marke, leaving hem wih no exposure o shoddy morgages. Wall Sree
rms paid op dollar or he riskies loans o sell o insiuional invesors worldwide
who were looking or greaer reurns on heir invesmens, leading brokers and lenders
rom whom hey were buying he loans on a race o he botom in erms o originaion
and compensaion pracices. Tose invesmen banks, which never ook ownership o
he loans hemselves, hen sliced and diced he loans ino securiies, paid he raings
agencies o bless hem, and passed hem along o invesors who were oen misinormed
o he underlying risks.
In shor, every link in he producion chain was insulaed rom he consequences obad lending, leaving homeowners and invesors holding he bag when he bubble
burs. Dodd-Frank aims o realign hese marke incenives rom op o botom, hereby
enabling he marke o produce more susainable morgages or homeowners and saer
securiies or invesors.
o ensure beter morgage originaion, Dodd-Frank requires lenders o ensure home-
owners have he abiliy o repay heir morgages. As he Consumer Finance Proecion
Bureau works o delineae he conours o his requiremen by he end o 2012, i
is imporan or i o resis indusry pressure o waer down is so-called qualied
morgage sandard, which ses ou he underwriing crieria or he saes caegory omorgages and esablishes an appropriae sandard o legal review or ensuring ha he
crieria are ollowed.
Dodd-Frank also prohibis he perverse compensaion pracices ha drove many mor-
gage brokers o seer borrowers ino morgages more expensive han hose or which
hey qualied, paricularly in Arican-American and Laino communiies, and bans mos
prepaymen penalies. Te eecive implemenaion o hese provisions is also key o
prevening predaory lending in he uure.
On he securiizaion side, Dodd-Frank requires issuers o morgage-backed securiies o
reain 5 percen o he credi risk or each securiy issued, giving hose securiizers skin
in he game. One o he mos conroversial pars o his provision is he exempion o
qualied residenial morgages rom he risk reenion requiremen, and marke par-
icipans are anxiously awaiing a nal rule. A broadly dened qualied residenial mor-
gage will help ensure an opimum balance beween access o credi and accounabiliy.
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Continue to ensure coordinated global financial reform and strong international
minimum standards are enacted
We all have a muual responsibiliy o deliver on all our commimens o address he weak-
nesses ha led o he nancial crisis. Now is he ime or he Leaders o he G20 boh o recom-
mi hemselves and deliver on he ambiious reorm objecives and agenda we have already
agreed o and o explore cooperaive approaches o meeing our common goals.President Obama, open letter to the Group of 20, March 29, 2010 45
Te nancial crisis did no jus aec he Unied Saes. Financial sysems are inercon-
neced and risks are spread across naional borders. Recognizing his ac, global leaders
a he Group o 20 Washingon Summi in 2008 agreed o move oward inernaional
agreemen on basic nancial rules in order o ensure proecions are in place o shield
axpayers rom risks emerging rom abroad, as well as o mainain an open and healhy
inernaional nancial services secor.46
Te Unied Saes has led he way in seting he inernaional reorm agenda by over-hauling is nancial regulaion hrough Dodd-Frank. Working alongside parners in he
European Union and oher G-20 naions, here has been subsanial progress made on
exending he ramework or sysemically imporan nancial insiuions o domesic
banks and global insurance companies, and in preparing an inegraed se o recommen-
daions or more eecive oversigh and regulaion o derivaives markes.47
Te leaders o he G-20 naions agreed o coordinae global sandards in banking regula-
ion in order o srenghen inernaional nancial sabiliy. Te Basel III banking reorms
increase he minimum regulaory capial requiremen rom 2 percen o 7 percen, and
subjec globally sysemically imporan banks o a 1 percen o 2.5 percen surcharge.48
Alhough Basel III ses ou a global sandard, i is no legally binding as counries are
required o implemen he accords ino heir own laws.49 Te Collins Amendmen o
Dodd-Frank creaed he sauory basis or he implemenaion o Basel III in he Unied
Saes. In June 2012 he Federal Reserve proposed nal rules on a regulaory capial
ramework which incorporaes he inernaional Basel III sandards.50
Te Obama adminisraion is pushing hrough he G-20 process or more progress on
he global implemenaion o bank capial requiremens in oher markes, paricularly
Asia, on rules regarding over-he-couner derivaives, and on he orderly resoluion
(winding down) o ailing nancial insiuions.51
Creaing minimum inernaional rules is essenial o proec nancial sabiliy globally,
including U.S. economic growh, and o preserve he advanages o an open and globally
inegraed nancial sysem and economy. Wihou condence in he srengh o nan-
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13 Center or American Progress | Dodd-Frank Financial Reorm Ater Two Years
cial insiuions and markes in oher counries, recen experience in Europe has shown
ha problems in one counry can spread rapidly.52A healhy global economy depends
upon a sable and inegraed global nancial sysem.
The benefits of Dodd-Frank financial reform
How the Dodd-Frank Act protects the interests o consumers, businesses, investors, and our economy
Our financial
markets
Before the financial and housing
crises of the Great Recession
The consequences of the twin crises
and the debilitating aftermath
After the progressive reforms that
will make our financial markets work
for everyone
Systemic supervision The nancial regulatory system is
ragmented, with no single regulator
responsible or the overall stability o the
nancial system or ability to oversee large
nonbank nancial institutions such as
insurance companies and investment rms.
Nearly 10 million jobs are lost,1 and the
average net worth o U.S. households drops
to $77,300 in 2010 rom $126,400 in 2007
ater the nancial crisis.2
The new Financial Stability Oversight
Council has responsibility or monitoring
systemic risk and identiying systemically
important nancial institutions, including
banks and nonbanks.
Capital requirements Banks are subject to capital requirements,
but in the lead up to the nancial crisis,
investment banks in particular became
vastly over-leveraged with debt.3
Financial institutions are unable to weather
economic shocks because o inadequate
capital buers; in 2009, when the Federal
Reserve carried out a test to measure thenancial health o the 19 largest banks, it
ound that 10 would have needed to raise a
total o $75 billion to have adequate capital
buers to withstand an adverse economic
shock.4
new rules require banks to hold additional
capital so that losses are absorbed by
private sector investors, not taxpayers; in
March 2012, 15 o the 19 largest banksare ound by the Federal Reserve to have
sufcient capital to absorb a new nancial
crisis.5
Too big to ail No clear resolution authority exists or
banks considered too big to ail, leaving
taxpayers unknowingly on the hook.
American taxpayers shell out billions
o dollars in ederal support to bail out
nancial institutions and restore condence
in the nancial markets.
Measures in Dodd-Frank include a process
to liquidate and sell o ailing institutions
without the need or bail outs; banks and
nonbanks are required to submit living
wills to assist in this process; nine o the
worlds largest banks presented their wills
to regulators in July 2012.6
Consumer protection Fragmented responsibility delegated across
several ederal agencies enables predatorylending on a massive scale, with consumers
vulnerable to conusing and sometimes
deceptive products and lending practices.
Consumers bear the brunt o the housing
and nancial crises, as housing valuesplummeted and mortgage oreclosures
ballooned.7
The Consumer Finance Protection Bureau
is created to enorce consumer nancialprotection laws, ensure consumer access to
nancial services, and promote consumer
education.
Executive pay Shareholders have only limited ability to
aect executive compensation, even in the
ace o huge disconnects between pay and
perormance.
The ratio o CEO-to-worker pay in S&P 500
companies widened rom 42-to-1 in 1980
to 380-to-1 in 2011.8
The new say-on-pay rules oer the
opportunity to reign in excessive executive
pay by requiring publicly traded rms to
submit executive compensation plans to
shareholder votes at least once every three
years, creating a stronger link between
executive pay and perormance.
Proprietary trading The banks taking ederally insured
customer deposits are also making
hundreds o billions o dollars o risky bets
or their own accounts.
Banks hold hundreds o billions in
mortgage securities on their trading books,
contributing to the nancial crisis.9 JP
Morgan Chase & Co.s losses o $5.8 billionon a directional bet10 demonstrates that
banks need strong rules to prevent them
rom taking risky bets to boost prots.
The Volcker Rule will prohibit ederally
insured banks rom proprietary trading,
ensuring that banks are no longer allowed
to engage in speculative activitiesunrelated to essential banking services.
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14 Center or American Progress | Dodd-Frank Financial Reorm Ater Two Years
Our financial
markets
Before the financial and housing
crises of the Great Recession
The consequences of the twin crises
and the debilitating aftermath
After the progressive reforms that
will make our financial markets work
for everyone
Over-the-counter
derivatives
The unregulated over-the-counter
derivatives market grows rapidly in the
1990s until it reached $683 trillion in
2008,11 with complex and opaque products
trading outside the scrutiny o regulations.
Large and opaque derivatives books
contribute to excessive leverage, nancial
contagion, and panic during the crisis. For
example, credit deault swaps contributed
to the all o the global insurance giant
American International Group Inc., which
cost taxpayers $182 billion.12
Most derivatives will be traded on a
regulated exchange and will be subject to
more transparency and oversight by the
regulatory agencies. Financial institutions
that deal in these products will be required
to hold more capital as a buer against
losses.
Mortgage
origination and
securitization
Securitization makes mortgages available
to more Americans, but misaligned
incentives encourage poor underwriting
and dangerous broker compensation
practices, resulting in the origination o
risky mortgages that ailed when the
housing bubble burst.
There was a more than 30 percent peak-
to-trough decline in home prices between
2006 and 2012,13 and banks have sent
oreclosure notices to more than 11 million
properties since 2007.14
Mortgage securitizers will now have to
retain a 5 percent share o the risk o a
securityexcept in the case o very sae
mortgagesand they cannot hedge or
sell the retained risk. Lenders will have to
ensure that customers have the ability to
repay their mortgage or the lie o the
loan, and originators cannot get paid more
to put borrowers into unnecessarily risky or
expensive mortgages.
Funding the inancial
regulators
Most o the nancial regulators have
unding streams. But the utures and
commodities regulatorthe Commodities
and Futures Trading Commissionis
unded solely through congressional
appropriations.
The Commodity Futures Trading
Commission has been vulnerable to budget
cuts and congressional appropriations
while it attempts to implement Dodd-
Frank.
Ensuring the commission is adequately
unded would provide a stable unding
source or the agency, enabling it to
implement Dodd-Frank and eectively
police the derivatives markets.
Ensuring
coordinated global
inancial reorm and
strong international
minimum standards
Globally interconnected nancial markets
spread risks across national borders with
minimal integrated global regulatory rules.
Continued problems in the Eurozone cast
a long shadow over global growth. Many
large nancial institutions are still closely
interconnected, so the impact o a breakup
o the currency could spread to the U.S.
economy.
There has been considerable progress
toward globally agreed-upon rules,15
but more needs to be done to protect
global nancial stability and to preserve
the advantages o an open and globally
integrated nancial system.
1 Philip J. Swagel, The Cost o the Financial Crisis: TheImpact o the September 2008 Economic Collapse.Brieng paper No. 18, (Pew Financial Reorm Group,2010), available at http://ww w.pewr.org/admin/proj-ect_reports/les/Cost-o-the-Crisis-nal.pd.
2 Board o Governors o the Federal Reserve System,Federal Reserve Bulletin, June 2012 (Federal Reserve ,2012).
3 Stephen Labaton, Agencys 04 Rule Let Banks PileUp New Debt, New York Times, October 2, 2008,available at http://ww w.nytimes.com/2008/10/03/business/03sec.html?_r=1.
4 Daniel Tarullo, Lessons rom the Crisis Stress Tests,speech at International Research Forum on MonetaryPolicy, Washington, D.C., March 26, 2010, available athttp://www.ederalreserve.gov/newsevents/speech/tarullo20100326a.htm.
5 Peter Evis and J.B Silver-Greenberg, 15 o 19 BigBanks Pass Feds Latest Stress Test, New York Times,March 13, 2012, available at http://www.nytimes.com/2012/03/14/business/jpmorgan-passes-stress-
test-raises-dividend.html.
6 Ronald D. Orol, Bank living-will plans center on re salehopes, Market Watch blog or the Wall Street Journal,July 10, 2012, available at http://articles.marketwatch.com/2012-07-10/economy/32608529_1_large-banks-commercial-bank-donald-lamson.
7 Center or Responsible Lending, Restoring Integrityto the Financial System Predatory Lending and theEconomic Crisis (2009), available at http://ww w.responsiblelending.org/allies/issue-guide-economic-crisis-nancial-reorm-sept-2009.pd.
8 Pat Garoalo, Average Fortune 500 CEO Now Paid 380Times As Much As The Average Worker, ThinkProgress,April 19, 2012, available at http://thinkprogress.org/economy/2012/04/19/467516/ceo-pay-gap-2011/.
9 James Crotty, Gerald Epstein, and Iren Levina, Pro-prietary trading is a bigger deal than many bankersand pundits claim, Policy Notes 15 (February 2010),available at http://www.peri.umass.edu/leadmin/pd/other_publication_types/SAFERbries/SAFER_note15.pd.
10 Jessica Silver-Greenberg, JPMorgan Says Trading Loss
Tops $5.8 Billion; Prot or Quarter Falls 9%, DealBookblog or New York Times, July 13, 2012, available athttp://dealbook.nytimes.com/2012/07/13/jpmorgan-reports-second-quarter-prot-o-5-billion-down-9/.
11 Jacob Gyntelberg and Carlos Mallo, OTC derivativesmarket activity in the second hal o 2008 (Basel: Banor International Settlements, 2009).
12 Bailed-out AIG sues U.S. or $30.2M, CBS News, July6, 2012, available at http://www.cbsnews.com/8301-505123_162-57467855/bailed-out-aig-sues-u.s-or-$30.2m/.
13 S&P/Case-Shiller Home Price Indices, available athttp://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpid--p-us---- (last accessed July 2012).
14 Center or Responsible Lending, Restoring Integrityto the Financial System Predatory Lending and theEconomic Crisis.
15 U.S. Department o State, World Finance Reorm StillWork in Progress, U.S. Ocial Says (2012), availableat http://iipdigital.usembassy.gov/st/english/ar-ticle/2012/04/201204194250.html#ixzz20oNN7yQA.
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15 Center or American Progress | Dodd-Frank Financial Reorm Ater Two Years
Conclusion
In a leter o he leaders o he G-20 in advance o he Rio Summi, he members o he
Financial Sabiliy Boardhe inernaional body ha moniors and makes recommen-
daions on he global nancial sysemsaid coninued nancial reorm was par o he
soluion o economic growh.53
Te sakes o seeing nancial reorms hrough are huge. As Dennis Kelleher o he
public advocacy group Beter Markes poined ou in a recen esimony beore a House
commitee, Te Dodd-Frank law is inended o proec he American people, axpay-
ers, and he U.S. reasury rom ever again having o suer hrough and pay or anoher
nancial collapse and economic crisis.54
Dodd-Frank creaed a new se o ools or regulaors o keep our nancial markes more
srong and secure. Te ask now is o nish he job ha was sared.
Jennier Erickson is Direcor o Compeiiveness and Economic Growh a he Cener orAmerican Progress, amara Fucile is Vice Presiden or Governmen Aairs a he Cener, and
David J. Luton is a Visiing Scholar a he Cener and a he Cener or European Sudies a
Harvard Universiy.
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16 Center or American Progress | Dodd-Frank Financial Reorm Ater Two Years
Endnotes
1 Alan Krueger, speech to the Treasury Borrowing AdvisoryCommittee on the Securities Industry and Financial MarketsAssociation, as cited in Jay Hefi n, Financial crisis costhouseholds $17 trillion, Treasury ocial says, The Hill,May 3, 2010, available at http://thehill.com/blogs/on-the-money/801-economy/95689-nancial-crisis-cost-house-holds-17-trillion-treasury-ocial-says.
2 Federal Reserve, Federal Reserve Bulletin, 98 (2) (2012).
3 Elizabeth Warren deends new consumer nancial agencyagainst strong criticism rom Republicans,Los AngelesTimes, March 16, 2011, available at http://latimesblogs.latimes.com/money_co/2011/03/elizabeth-warren-consum-er-nancial-protection-bureau-congress-oversight-deend.html.
4 David Nakamura and Felicia Sonmez, Obama appointsRichard Cordray to head co nsumer watchdog bureau,TheWashington Post, January 4, 2012, available at http://www.washingtonpost.com/politics/richard-cordray-appointed-by-obama-to-head-consumer-watchdog-bureau/2012/01/04/gIQAGyqraP_story.html.
5 Consumer Finance Protection Bureau, CFPB probe intoCapital One credit card marketing results in $140 mill ionconsumer reund, Press release, July 18, 2012, availableat http://www.consumernance.gov/pressreleases/cpb-capital-one-probe/.
6 Matthias Rieker, Andrew R. Johnson, and Alan Zibel, CapitalOne Dealt Fine For Pitch to Customers,TheWall Street Jour-nal, July 18, 2012, available at http://online.wsj.com/article/SB10001424052702304217904577534782507899336.html.
7 Know Beore You Owe, available at http://www.consumer-nance.gov/knowbeoreyouowe/.
8 Michael Barr, Dont Roll Back Wall Street Reorm: Dodd-Frank Act Key to a Healthy Financial System (Washington:Center or American Progress, 2011).
9 Center or Responsible Lending, Restoring Integrity tothe Financial System Predatory Lending and the EconomicCrisis (2009), available at http://www.responsiblelending.org/allies/issue-guide-economic-crisis-nancial-reorm-sept-2009.pd.
10 PWC, FS Regulatory Brie: The FSOC Finalizes Rules andGuidance or Designating Non-Bank Financial Companies as
SIFIs (2012), available at http://www.pwc.com/en_US/us/nancial-services/regulatory-services/publications/assets/pwc-soc-non-bank-si-nal-rule-summary.pd.
11 Financial Stability Oversight Council, Financial StabilityOversight Council Makes First Designations in Eort toProtect Against Future Financial Crises, Press release, July18, 2012, available at http://www.treasury.gov/press-center/press-releases/Pages/tg1645.aspx.
12 Ira Teinowitz, Dodd-Franks SIFI designations to hit non-bank rms, The Deal Pipeline Blog, April 9, 2012, available athttp://www.thedeal.com/content/regulatory/dodd-ranks-si-designations-to-hit-nonbank-rms.php.
13 Peggy Twohig and Steve Antonakes, The CFPB launches itsnonbank supervision program, CFPB Blog, January 5, 2012,available at http://www.consumernance.gov/blog/the-cpb-launches-its-nonbank-supervision-program/.
14 Daniel Tarullo, Testimony beore the Senate Committee onBanking Housing and Urban Aairs, Implementing WallStreet Reorm: Enhancing Bank Supervision and ReducingSystemic Risk, June 6, 2012, available at http://banking.senate.gov/public/index.cm?FuseAction=Hearings.LiveStream&Hearing_id=99710e94-9342-4d7a-ae92-a446579454.
15 Allan Mattich, More Capitals Answer to Too Much BankRegulation, The Source Blog, TheWall Street Journal, July 12,2012, available at http://blogs.wsj.com/source/2012/07/12/more-capitals-answer-to-too-much-bank-regulation/.
16 Peter Evis and J.B Silver-Greenberg, 15 o 19 Big Banks PassFeds Latest Stress Test, TheNew York Times, March 13, 2012,available at http://www.nytimes.com/2012/03/14/business/jpmorgan-passes-stress-test-raises-dividend.html.
17 Daniel Tarullo, speech at International Research Forumon Monetary Policy, Lessons rom the Crisis Stress Tests,Washington, D.C., March 26, 2010, available at http://www.ederalreserve.gov/newsevents/speech/tarullo20100326a.
htm.
18 Shelia Bair, FDIC Oversight: Examining and Evaluating theRole o the Regulator during the Financial Crisis and Today,Testimony beore the House Subcommittee on FinancialInstitutions and Consumer Credit, May 26, 2011, availableat http://www.dic.gov/news/news/speeches/chairman/spmay2611.html.
19 Ronald D. Orol, Bank living-will plans center on re salehopes, MarketWatch, July 10, 2011, available at http://arti-cles.marketwatch.com/2012-07-10/economy/32608529_1_large-banks-commercial-bank-donald-lamson.
20 Ronald D. Orol, Banks ace 2012 deadline or living wills,MarketWatch, September 13, 2011, available at http://arti-cles.marketwatch.com/2011-09-13/economy/30704186_1_dic-banks-ace-oreign-banks.
21 Alexandra Alper and David Henry, Top banks say they
not too big to ail,Reuters, July 3, 2012, available at http://www.reuters.com/article/2012/07/03/banks-bailouts-wills-idUSL2E8I3C3M20120703.
22 James Lamont, Buett hits at negligent US executive pay,Financial Times, March 25, 2011, available at http://ww w.t.com/intl/cms/s/0/43627d0a-5712-11e0-9035-00144ea-b49a.html#axzz20W2hM04A.
23 Diane Brady, Say on Pay: Boards Listen When ShareholdersSpeak, Bloomberg Businessweek, June 7, 2012, available athttp://www.businessweek.com/articles/2012-06-07/say-on-pay-boards-listen-when-shareholders-speak.
24 Ibid.
25 Aaron Ricadela, Hewlett-Packard Shareholders Vote AgainstExecutive Compensation Packages, Bloomberg, March 23,2012, available at http://www.bloomberg.com/news/2011-03-23/hewlett-packard-shareholders-vote-against-execu-tive-pay-1-.html.
26 Ex-Treasury secretaries back Volcker rule, Reuters,February 21, 2010, available at http://www.reuters.com/article/2010/02/22/us-nancial-regulation-secretaries-idUSTRE61L0BB20100222
27 Peter Coy, JPMorgans Big Loss: Volckers Not So DumbAter All, Bloomberg Businessweek, May 11, 2012, availableat http://www.businessweek.com/articles/2012-05-11/jpmorgans-big-loss-volckers-not-so-dumb-ater-all.
28 Je Merkley, Senate Committee on Banking Housing andUrban Aairs, A Breakdown in Risk Management: WhatWent Wrong at JP Morgan Chase?, available at http://bank-ing.senate.gov/public/index.cm?FuseAction=Hearings.LiveStream&Hearing_id=da72e001-ea93-4462-9057-a692b11e9c54.
29 Obama talks JP Morgan, calls or Wall Street reorm, CBSNews, May 15, 2012, available at http://www.cbsnews.com/
video/watch/?id=7408630n
30 Volcker Rule,The New York Times, May 10, 2012, availableat http://topics.nytimes.com/top/reerence/timestopics/subjects/v/volcker_rule/index.html.
31 Wall Street Reorm, available at http://www.levin.senate.gov/issues/wall-street-reorm.
32 Buett warns on investment time bomb, BBC News, March4, 2003, available at http://news.bbc.co.uk/2/hi/2817995.stm.
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33 Jacob Gyntelberg and Carlos Mallo, OTC derivatives marketactivity in the second hal o 2008, (Basel, Switzerland: Bankor International Settlements, 2009), available at http://www.bis.org/publ/otc_hy0905.pdf.
34 Bailed-out AIG sues U.S. or $30.2M, CBS News, July 6, 2012,available at http://www.cbsnews.com/8301-505123_162-57467855/bailed-out-aig-sues-u.s-or-$30.2m/.
35 Brady Dennis, Ater 24 years, AIG lays Financial Prod-ucts unit to rest, TheWall Street Journal, August 5, 2011,available at http://www.washingtonpost.com/business/economy/ater-24-years-aig-lays-nancial-products-unit-to-
rest/2011/08/05/gIQAvty4wI_story.html.
36 US regulator nally denes a swap, starts reormcountdown, Reuters, July 10, 2012, available at http://in.reuters.com/article/2012/07/10/ctc-swap-vote-idIN-L2E8IA3K720120710.
37 Committee on Financial Services Democrats, BarneyFranks Statement Regarding Further Evidence o the Needor Adequate CFTC Funding, Press release, June 29, 2012,available at http://democrats.nancialservices.house.gov/press/PRArticle.aspx?NewsID=1477.
38 Letter rom American or Financial Reorm to CongressionalRepresentatives, June 12, 2011, available at http://ournan-cialsecurity.org/blogs/wp-content/ournancialsecurity.org/uploads/2012/06/AFR-CFTC-Approps-Letter-6-21-121.pd.
39 Ibid.
40 CFTC, Commodity Futures Trading Commission PresidentsBudget FY 2013 (2012), available at http://w ww.ctc.gov/ucm/groups/public/@newsroom/documents/le/ctcbud-get2013.pd.
41 Nick Paraskeva, Barclays case gives U.S. utures regulatormore clout on overseas derivatives, unding, Financial Reg-ulatory Forum Blog, Reuters, July 5, 2012, available at http://blogs.reuters.com/nancial-regulatory-orum/2012/07/05/barclays-case-gives-u-s-utures-regulator-more-clout-on-overseas-derivatives-unding/.
42 Oce o Management and Budget, Budget of the UnitedStates Government, Fiscal Year 2013: Appendix(2012), avail-able at http://www.whitehouse.gov/omb/budget/Appen-dix.
43 Letter rom Americans or Financial Reorm to Congress,May 4, 2010, available at http://ournancialsecurity.org/blogs/wp-content/ournancialsecurity.org/up-loads/2012/05/AFR-CFTC-Funding-Letter-05-4-12.pd.
44 Speech rom Governor Sarah Bloom Raskin at the 2011Midwinter Housing Finance Conerence, Park City, Utah,February 11, 2011, available at http://ederalreserve.gov/newsevents/speech/raskin20110211a.htm.
45 Ryan McCarthy, Obama To G20: Its Time To Act OnFinancial Reorm, Can He Get World Leaders On Board?,The Hungton Post, March 29, 2010, available at http://www.hungtonpost.com/2010/03/30/obamas-tells-g20-to-lead_n_518587.html.
46 Brown heralds G20s route map, BBC News, November16, 2008, available athttp://news.bbc.co.uk/2/hi/uk_news/
politics/7731932.stm.
47 U.S. Department o State, World Finance Reorm StillWork in Progress, U.S. Ocial Says, April 19, 2012, avail-able at http://iipdigital.usembassy.gov/st/english/ar-ticle/2012/04/201204194250.html#ixzz20oNN7yQA.
48 Basel III,Financial Times, available at http://lexicon.t.com/Term?term=Basel-III.
49 Kevin F. Barnard and Alan W. Avery, Basel III v Dodd-Frank:What Does it mean or US Banks, Whos Who Legal Bl og,available at http://www.whoswholegal.com/news/eatures/article/28829/basel-iii-v-dodd-rank-does-mean-us-banks/.
50 The Federal Reserve Proposes Basel III Capital Frame-work or U.S. Financial I nstitutions, Financial Regula-tory Reorm Center Blog, June 2012, available at http://nancial-reorm.weil.com/commercial-banks/ederal-reserve-proposes-basel-iii-capital-ramework-nancial-
institutions/#ixzz211O5u3uo.
51 U.S. Department o State, World Finance Reorm.
52 Letter rom Financial Stability Board to G-20 Leaders, June13, 2012, available at http://www.nancialstabilityboard.org/publications/r_120619d.pd.
53 Ibid.
54 Dennis M. Kelleher, The Impact o Dodd-Frank onCustomers, Credit, and Job Creators, Testimony beorethe Committee on Financial Services Subcommittee onCapital Markets and Government Sponsored Enterprises,during Questions and Answers, July 10, 2012, available athttp://nancialservices.house.gov/Calendar/EventSingle.aspx?EventID=301909.
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