Question

Why did the Dodd-Frank Act (2010) not successfully regulate the financial sector?

Answer 1

The Dodd-Frank Act was passed by the Obama administration in 2010 as a response to the financial crisis of 2008.

The act established a number of new government agencies tasked with overseeing various components of the act and by extension various aspects of the banking system.

However, there were certain demerits of this act, explained as follows:

Dodd-Frank act was to prevent the economy from experiencing a crisis like that of 2008 and protect consumers from many of the abuses that contributed to that crisis. Unfortunately, limiting the risks that a financial firm is able to take also decreases its profit-making ability. The bill harmed the competitiveness of U.S. firms relative to their foreign counterparts.

While each institution is undoubtedly safer due to capital constraints imposed by Dodd-Frank, these constraints make for a more il-liquid market overall. The lack of liquidity can be especially potent in the bond market, where all securities are not mark-to-market and many bonds lack a constant supply of buyers and sellers.

The higher reserve requirements under Dodd-Frank meant banks must hold a higher percentage of their assets in cash, which decreased the amount they are able to hold in marketable securities. In effect, this limits the bond market-making role that banks had traditionally undertaken. With banks unable to play the part of a market maker, prospective buyers had a harder time finding counteracting sellers, but, more importantly, prospective sellers found it more difficult to find counteracting buyers.

The act ultimately hurt economic growth.The act affected in the form of higher unemployment, lower wages and slower increases in wealth and living standards.It had cost money to operate new agencies and enforce new rules — over 225 new rules across a total of 11 federal agencies, to be exact — and that money came from taxpayers.