Question

Dodd Frank has become an important issue of public debate and there are new developments in the House of Representatives that could result in legislative challenges to Dodd Frank in the near future.

Outline some at least one criticism of Dodd Frank. Try to be as specific as you can. And if you have an opinion on the issue please express it.

Answer 1

The Dodd-Frank legislation provokes either glowing praise from consumers and reformists or angry diatribes from industry officials and Republican lawmakers. “There are a lot of reasons for legitimate criticism of Dodd-Frank, even beyond the top-level worries about financial stability. Three, in particular, have been raised by the administration and the current Republican leadership in Congress, and have some merit.

New capital standards and derivatives rules: New derivatives rules and tough capital and risk standards will make the U.S. less competitive with its global competitors. "It increased uncertainty for American businesses and hindered their ability to promote economic growth and create jobs." Capital markets need risk to function and the ideal solution would rely on better information and transparency so investors can make informed decisions -- not elimination of risk. "The worst thing about Dodd-Frank is the misguided effort to remove risk from the system," said Dan Crowley, a partner at K&L Gates and head of the capital markets reform group. "Risk is essential to the capital formation process. Empowering the government to reduce risk in the system will inevitably increase compliance costs and decrease investor returns."

Another issue in Dodd-Frank that is legitimate to be concerned about is: Is there too much burden on the banking system and not enough attention paid to the rest of the financial system? Most of the regulations are specified in terms of bank oversight, in part because banks were at the core of the problem and have the most public insurance, and in part because that’s what was easiest to regulate. Nonetheless, it leads to distortions in good times that nonbanks get a considerable advantage, versus the banking system, because they’re not as regulated. And it raises the potential that in bad times the crisis could come from the nonbank part of the system anyway.