What’s the Status of the Dodd-Frank Financial Overhaul?
Follow @azmatzahraMay 10, 2012, 4:49 pm ET
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In July 2010, President Barack Obama signed what became known as the Dodd-Frank bill, aimed at overhauling the financial regulatory system and ending the risky practices that led to the 2008 crisis.
The legislation — more than 2,300 pages long – included some rules against risk-taking by banks, new consumer protections and additional powers for regulators. Some aspects of the overhaul — including the creation of the Consumer Financial Protection Bureau (CFPB) and the Financial Stability Oversight Council (FSOC); increasing capital requirements for banks; making executive compensation more transparent; and capping the fees companies can charge on debit card transactions — have already gone into effect.
But much of the rulemaking is ongoing, and progress has been slow. Critics warn that as powerful industry lobbyists wield their influence, the final regulations won’t go far enough. As Jared Bernstein, former economic adviser to Vice President Biden, told FRONTLINE:
Here’s a closer look at three Dodd-Frank provisions currently under scrutiny in Washington DC.
The Volcker Rule
A centerpiece of the reform bill is a rule proposed by former Federal Reserve chief Paul Volcker that would bar banks from proprietary trading — or making trades for their own benefit — using customer funds.
After extensive industry lobbying by the banks, which see a threat to some of their most profitable activities, the rule has ballooned from 10 pages to almost 300 pages of exemptions and loopholes. After initial fears that the lobbying would delay the completion of the rules, some officials say it could could be completed by September or even as early as this summer. (The legislation set a deadline of July 2012.)
Derivatives can be many things, but are basically contracts or bets that derive their value from the performance of something else — an interest rate, a bond or stock, a loan, a currency, a commodity, virtually anything. Because most derivatives are not traded on a regulated exchange, their prices and fees are not reported publicly, making it easier for institutions to charge higher rates.
Part of the derivative reforms – requiring that most derivative transactions go through a central clearinghouse, or a third party that can guarantee them if one party defaults and thus absorb the risk — has already gone into effect. But many rules in Title VII are still being hammered out by the Commodities and Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), including the definition of swap products and the requirement that most derivatives be traded on an open exchange so that prices are public.
Derivatives defenders say the instruments are smart, innovative risk-management tools that shouldn’t be written off or overly regulated. But critics warn that derivatives are dangerously risky, and just too lucrative for banks not to use their power to fight regulations — or pre-empt them with other legislation.
Dodd-Frank lays out a mechanism for resolving (or closing down) failing banks and certain non-bank financial institutions deemed too systemically risky for traditional bankruptcy. Essentially the Federal Deposit Insurance Corporation (FDIC) can draw from the U.S. Treasury to resolve an institution and then repay taxpayers by selling off the failed firm’s assets, and through additional fees.
Though the legislation has already gone into effect — today the FDIC announced details about plans to dismantle failing banks — House Republicans recently moved to repeal resolution authority, claiming doing so would save taxpayers $22 billion over 10 years.
Can Dodd-Frank Work?
Watch and read analysis from FRONTLINE interviews for Money, Power and Wall Street about whether the Dodd-Frank legislation goes far enough, how it will affect banks, what’s missing from the bill and the power of the Wall Street lobby to affect its outcome.
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