The Restoring American Financial Stability Act of 2010 or The Dodd-Frank Act (DFA, the Act) was enacted on July 21, 2010, is positioned as the response of the government to the 2007 financial crisis (Nwogugu 520). Its objectives included reducing the threats and impacts of the crisis, protecting consumer rights, and promoting the financial market transparency.
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The DFA was labeled as an attempt to “realign conflicting interests” which was reflected in defining the groups of actors within the market (for example, the group of banks, that of insurers) and providing regulators and regulations for them (Smith and Muniz-Fraticelli 619).
Specifically, the DFA presupposed the creation of the Financial Stability Oversight Council, a body intended to monitor economic risks, and the Bureau of Consumer Financial Protection, an agency meant to protect consumer rights (Paletta and Lucchetti par. 7; Nwogugu 526). At the same time, the Act was designed to keep the general regulatory system more or less unchanged (Paletta and Lucchetti par. 17). Apart from that, to predict possible situations and be flexible, the Act suggests emergency plans and methods of eliminating dangerous actions. (Smith and Muniz-Fraticelli 623).
The DFA was expected to “reduce systemic risk, increase the transparency of the financial markets, and promote market integrity” (Forrester and Astolfi 14). However, its efficiency has been questioned since the year of its inaction. Initially, the Democrats appeared to be rather appreciative and hopeful about the possible outcomes of the Act, especially pointing out the crisis-resistance and customer protection opportunities of the legislation. At the same time, Republicans pointed out the increasing federal government power suggested by the Act and found it unsettling (Paletta and Lucchetti par. 6-9).
The outcomes of the DFA appear to have left the economists disappointed. It was criticized, labeled as inefficient, and “inadequate as a response to the global financial crisis” (Nwogugu 520). The reasons for that are numerous. So far, while no significant economic growth has been attributed to the DFA by the scholars, they keep pointing out the fact that the Act results in the rising costs of doing business (Forrester and Astolfi 15; Nwogugu 520; Prasch 549-555; Smith and Muniz-Fraticelli 623).
Apart from that, it appears that the DFA did not live up to the expectations. Nwogugu points out many issues that the DFA has not addressed, for example, that of bank liquidity or the antitrust regulation weaknesses (524-532).
Besides, several issues have been attended by the Act, but the results have not been enough to satisfy reviewers. For instance, according to Nwogugu, the regulation of insurance and reinsurance companies suggested by the DFA is not sufficient (526). Similarly, the DFA was expected to raise the market discipline. The success achieved in this field was only partial as for particular firms (especially the too-big-to-fail ones) the discipline appears to have decreased instead (Balasubramnian and Cyree 165).
This could be explained by the limited range of the DFA incentives and deterrents, which has been pointed out as another weakness of the Act. Fines are the primary regulation means suggested by the DFA, which has proved to be ineffective especially for bigger companies (Smith and Muniz-Fraticelli 626).
It may, therefore, be concluded that the initial aims of the DFA do not seem to be fulfilled while its inefficiency has been pointed out by numerous researchers. As a result, positively evaluating DFA does not appear to be an option for the time being.
Balasubramnian, Bhanu, and Ken Cyree. “Has Market Discipline On Banks Improved After The Dodd–Frank Act?” Journal of Banking & Finance 41 (2014): 155-166. ScienceDirect. Web.
Forrester, Paul, and Paul Astolfi. “The Dodd–Frank Act’s Consequences for The Energy Industry”. The Electricity Journal 24.5 (2011): 14-20. ScienceDirect. Web.
Nwogugu, Michael. “Failure of the Dodd-Frank Act.” Journal of Financial Crime 22.4 (2015): 520-572. Emerald. Web.
Paletta, Damian, and Aaron Lucchetti. “Law Remakes U.S. Financial Landscape”’. The Wall Street Journal. Dow Jones Products. 2010. Web.
Prasch, Robert. “The Dodd-Frank Act: Financial Reform Or Business As Usual?” Journal of Economic Issues 46.2 (2012): 549-556. ScienceDirect. Web.
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Smith, Larissa, and Victor Muniz-Fraticelli. “Strategic Shortcomings Of The Dodd-Frank Act”. The Antitrust Bulletin 58.4 (2013): 617-633. ScienceDirect. Web.