The Impact of the Dodd-Frank Act on Financial Stability and Economic Growth

By Martin Neil Baily, Aaron Klein, Justin Schardin

Wednesday, January 11, 2017

This report was originally published in the Russell Sage Foundation Journal of the Social Sciences.


This article assesses the benefits and costs of key provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) that strengthened regulation following the financial crisis. The provisions are placed into five groupings: clear wins, clear losses, costly tradeoffs, unfinished business, and too soon to tell.

Clear wins include higher prudential standards, including for capital; the single-point-of-entry resolution authority; creation of the Consumer Financial Protection Bureau (CFPB); and greater transparency and oversight of derivatives. Clear losses are restrictions on Federal Reserve emergency lending authority and forcing the Federal Deposit Insurance Corporation to obtain permission from Congress before providing temporary liquidity guarantees.

Costly tradeoffs are the Volcker Rule and the Lincoln Amendment. Unfinished business includes regulatory consolidation and more independence for the Financial Stability Oversight Council and the Office of Financial Research. Too soon to tell are requirements and standards for leverage ratios, capital buffers, stress testing, and liquidity requirements.

Although Dodd-Frank has been largely successful in stabilizing the financial sector, it still needs to be fine-tuned.

Dodd-Frank was designed to increase financial stability and prevent future devastation from financial crises. Dodd-Frank established the CFPB, increased capital and other prudential requirements, augmented oversight of financial institutions, and created new resolution procedures to safely wind down institutions when they fail. Through these and other reforms, the financial sector is much safer today than before the crisis.

A full accounting of Dodd-Frank, however, must assess how the new law has balanced improved financial stability against economic growth and other factors. Dodd-Frank has achieved much, but as with any sweeping set of reforms, there are lessons to learn from its implementation and there are corrections and adjustments that could improve its outcomes.

KEYWORDS: CONSUMER FINANCIAL PROTECTION BUREAU (CFPB), DODD-FRANK ACT, FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC), FEDERAL RESERVE, FINANCIAL STABILITY OVERSIGHT COUNCIL (FSOC), LINCOLN AMENDMENT, VOLCKER RULE

Attached files