Skip to Main Content
Have library access? Log in through your library
Perspectives on Dodd-Frank and Finance

Perspectives on Dodd-Frank and Finance

edited by Paul H. Schultz
Copyright Date: 2014
Published by: MIT Press
Pages: 264
  • Cite this Item
  • Book Info
    Perspectives on Dodd-Frank and Finance
    Book Description:

    The Dodd--Frank Wall Street Reform and Consumer Protection Act, passed by Congress in 2010 largely in response to the financial crisis, created the Financial Stability Oversight Council and the Consumer Financial Protection Bureau; among other provisions, it limits proprietary trading by banks, changes the way swaps are traded, and curtails the use of credit ratings. The effects of Dodd--Frank remain a matter for speculation; more than half of the regulatory rulemaking called for in the bill has yet to be completed. In this book, experts on Dodd--Frank and financial regulation -- academics, regulators, and practitioners -- discuss the ways that the law is likely to succeed and the ways it is likely to come up short. Placing their discussion in the broader context of regulatory issues, the contributors consider banking reform; the regulation of derivatives; the Volcker Rule, and whether or not banks should be forced to stop proprietary trading; the establishment of the Consumer Financial Protection Bureau, and possible flaws in its conception; the law and "too-big-to-fail" institutions; mortgage reform, including qualification requirements and securitization; and new disclosure requirements regarding CEO compensation and conflict minerals.ContributorsJames R. Barth, Jeff Bloch, Mark A. Calabria, Charles W. Calomiris, Shane Corwin, Cem Demiroglu, John Dearie, Amy K. Edwards, Raymond P. H. Fishe, Priyank Gandhi, Thomas M. Hoenig, Christopher M. James, Anil K Kashyap, Robert McDonald, James Overdahl, Craig Pirrong, Matthew Richardson, Paul H. Schultz, David Skeel, Chester Spatt, Anjan Thakor, John Walsh, Lawrence J. White, Arthur Wilmarth, Todd J. Zywicki

    eISBN: 978-0-262-32592-9
    Subjects: Finance

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. Acknowledgments
    (pp. ix-x)
  4. 1 Introduction
    (pp. 1-8)
    Paul H. Schultz

    To understand the origins of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, it is helpful to recall the events of September 2008. On September 7, mortgage giants Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Corporation) were taken over by the government. On Sunday, September 14, Bank of America purchased failing broker and investment banker Merrill Lynch. On the following day, Lehman Brothers, with $639 billion in assets, filed for bankruptcy. It was by far the largest U.S. bankruptcy ever. The next day, September 16, American International Group (AIG)...

  5. 2 Economic Principles, Government Policy, and the Market Crisis
    (pp. 9-24)
    Chester Spatt

    Much can be learned from economic principles and policies about the challenges that the economy faced during the financial crisis that began in 2007. As they reacted to dramatic challenges and unprecedented concerns, policymakers found it easy to avoid internalizing some crucial implications of economic principles for the new and challenging contexts that they confronted. Financial economics has much to contribute to policy discussions. From a research perspective, these debates suggest interesting issues for financial theory and financial economics, much of which is potentially relevant to the implementation of the Dodd–Frank Wall Street Reform and Consumer Protection Act of...

  6. 3 The Basics of Too Big to Fail
    (pp. 25-42)
    Lawrence J. White

    The financial crisis of 2008 brought to political and regulatory prominence the concept of financial institutions that are “too big to fail” (TBTF). TBTF financial institutions were at the heart of the crisis. TBTF institutions were the first recipients of bailouts from the U.S. government through the Troubled Asset Relief Program (TARP) and other federal measures to forestall their reneging on their debt obligations (and in that sense, failing).¹

    The severity of the financial crisis and the Great Recession that followed plus the unpopularity of the apparent bailouts² and the TARP program made financial reform legislation inevitable. The Dodd–Frank...

  7. 4 Creating a Responsive, Accountable, Market-Driven Financial System
    (pp. 43-54)
    Thomas M. Hoenig

    Narrowing the safety net so that we have a more responsive, accountable, market-driven financial system is of great importance to the long-run economic stability and financial growth of the United States. It is something that I have devoted a significant amount of attention and research to over the past several years as we have experienced the consequences of the crisis of 2008 and its relationship with financial institutions that are considered too big to fail.

    The current configuration of the financial system remains a risk to the public and an impediment to the competitive vitality and strength of the U.S....

  8. 5 Panel Discussion on Banking Reform
    (pp. 55-80)
    Anil K Kashyap, James Overdahl, Anjan Thakor and John Walsh

    James Overdahl: We will focus on some specific aspects of banking reform—particularly, what has led us to bank reform in the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010. Gary Gorton’s wonderful essay entitled “Slapped in the Face by the Invisible Hand” is one explanation of what happened. It seems to me that what we experienced during the crisis was not a George Bailey problem, although we may have benefitted from having a few more Mr. Potters around. It was not a run on retail deposits like during the Great Depression but an institutional bank run....

  9. 6 Panel Discussion on Stability, Resolution, and Dodd–Frank
    (pp. 81-104)
    James R. Barth, John Dearie, David Skeel and Arthur Wilmarth

    Arthur Wilmarth: Our panelists have published excellent work analyzing Titles I and II of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, which are closely connected. Title I includes sections 165 and 166, which mandate enhanced prudential standards for systemically important financial institutions (SIFIs). We are not going to address at any length the procedure for designating systemically important nonbank institutions under section 113, but that certainly is an important topic in its own right. We are primarily going to talk about bank SIFIs with over $50 billion in assets. If the Financial Stability Oversight Council...

  10. 7 The Origins and Intent of the Volcker Rule
    (pp. 105-114)
    Priyank Gandhi

    The Volcker Rule is the popular name for section 619 of the Dodd– Frank Wall Street Reform and Consumer Protection Act.¹ The rule is named after the American economist and former chair of the Federal Reserve Board, Paul Volcker.

    After the financial crisis of 2007, President Barrack Obama created the President’s Economic Recovery Advisory Board and appointed Paul Volcker as its chair. Shortly thereafter, in aNew York Timesop-ed article, Volcker argued that actions by regulators to rescue large financial institutions during the crisis had enhanced their incentives to risk-taking and leverage.² In his view, moral hazard associated with...

  11. 8 Panel Discussion on the Volcker Rule
    (pp. 115-136)
    Charles W. Calomiris and Matthew Richardson

    Matthew Richardson:¹ Given the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, the question is whether we are better off with or without the Volcker Rule. For all of the contributing authors in this book, there is probably much less unanimity about Volcker than anything else. In this chapter, it is NYU/Columbia, pro-Volcker/anti-Volcker: really exciting stuff.

    First, I will take a quick step back and give what I think may be the right approach to regulation and note why Dodd–Frank does not do it and why it may be second best. Second, I am going to...

  12. 9 Panel Discussion on the Consumer Financial Protection Bureau
    (pp. 137-158)
    Jeff Bloch, Shane Corwin and Todd J. Zywicki

    Shane Corwin: Our panel will discuss the Consumer Financial Protection Bureau (CFPB) that was created under Title X of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010. If any aspect of Dodd–Frank could be considered more controversial than the others, this one certainly could be it. The CFPB is an independent bureau housed within the Board of Governors of the Federal Reserve that has rulemaking supervisory and enforcement authority over most firms that are involved in business-related consumer financial services.

    The CFPB’s mandate is to protect consumers from unfair, deceptive, or abusive financial practices. As...

  13. 10 Panel Discussion on Derivatives and Dodd–Frank
    (pp. 159-182)
    Amy K. Edwards, Raymond P. H. Fishe, Robert McDonald, Craig Pirrong and Paul H. Schultz

    Paul H. Schultz: The Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 regulates derivatives, including swaps. In a swap contract, two counterparties agree to trade a series of cash flows. In a traditional interest-rate swap, one party contracts to pay a fixed rate of interest on a notional amount to the second party, and the second party contracts to pay a floating rate to the first. Whoever has the larger payment when a payment is due pays the net amount to the other party. The payments are made on a regular time schedule (say, quarterly). In a...

  14. 11 Mortgage Reform under the Dodd–Frank Act
    (pp. 183-200)
    Mark A. Calabria

    Many, if not most, accounts of the financial crisis of 2008 include a prominent role for the U.S. residential mortgage market. Although other U.S. property markets, such as commercial and retail, exhibited similar boom-and-bust patterns, the elevated level of defaults and associated costs borne by the taxpayer have brought a particular emphasis on American single-family mortgage finance policies. It should be of little surprise that the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 contains multiple provisions related to mortgage finance. This chapter offers a review of those provisions, followed by an evaluation of their likely effect...

  15. 12 The Dodd–Frank Act and the Regulation of Risk Retention in Mortgage-Backed Securities
    (pp. 201-216)
    Cem Demiroglu and Christopher M. James

    In contrast to traditional lending (in which vertically integrated lenders own and service the loans that they originate), securitization involves a number of different agents who perform different services often for fees that may be unrelated to the performance of the securitized pool of loans.¹ A potential problem with securitization is that loan originators might retain too little skin in securitized loans and have limited incentives to screen the mortgages that they originate with the intent to securitize. Critics of securitization contend that an important contributor to the collapse of the real estate and mortgage markets that began in 2007...

  16. 13 The Controversial New Disclosure Requirements in Dodd–Frank
    (pp. 217-224)
    Paul H. Schultz

    The Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 touches on almost all areas of finance. Two of the lesser-known provisions — the internal pay equity rule and the conflict minerals rule — seem especially controversial. Each requires companies to disclose information that is unlikely to be material to investors.

    The Dodd–Frank Act’s section 1502, Conflict Minerals, requires companies to report whether gold, tantalum, tin, and tungsten that are used in the companies’ products originate in the Democratic Republic of the Congo (DRC) or surrounding countries and, if so, to report whether the mineral is “conflict free.” As...

  17. 14 Conclusions
    (pp. 225-232)
    Paul H. Schultz

    It is now more than three years since the passage of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, but the law is far from being fully implemented (U.S. Government Accountability Office 2013). At the time of this writing (November 2013), 280 Dodd–Frank rulemaking deadlines have passed. Of the 280 deadlines, 170 (60.7 percent) have been missed, and 110 (39.3 percent) have been met with finalized rules. Regulators have not released proposals for 60 of the 170 missed rules (DavisPolk 2013).

    There are an additional 118 rulemaking requirements without a deadline for a total of...

  18. About the Authors
    (pp. 233-244)
  19. Index
    (pp. 245-250)