Post-2008 Financial Crisis Regulations
The 2008 financial crisis originated in the United States as a result of the housing market collapse. To address this crisis, the government passed Dodd-Frank and the Emergency Economic Stabilization Act. Dodd-Frank modified existing regulations and introduced new provisions, while the Emergency Economic Stabilization Act provided $475 billion in bailout relief through the Troubled Asset Relief Program.
In the late 2000s, the United States faced a severe economic downturn due to the collapse of the housing market, impacting global financial stability. Many well-known banks, lenders, insurers, and loan associations failed, leading to the Great Recession.
To address the crisis, Presidents George W. Bush and Barack Obama introduced legislation like the Dodd-Frank Wall Street Reform and Consumer Protection Act (CPA) and the Emergency Economic Stabilization Act (EESA). The EESA established the Troubled Asset Relief Program (TARP) to stabilize the economy and tackle the financial turmoil.
Dodd-Frank Wall Street Reform
In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. This influential measure aimed to regulate the financial sector's activities and safeguard consumers by implementing sweeping reforms in the U.S. financial sector.
Dodd-Frank introduced several significant measures to regulate the financial sector and protect American consumers:
- Consumer Financial Protection Bureau (CFPB): Established to monitor and safeguard the financial interests of consumers.
- Financial Stability Oversight Council (FSOC): Monitors designated systemically important financial institutions (SIFIs), such as banks and insurance companies considered "too big to fail." It comprises voting members from the Department of the Treasury, the Federal Reserve Board, and the Securities and Exchange Commission. FSOC requires testing and documentation of SIFIs' operations and has the authority to reorganize these institutions to reduce overall economic risk.
- Volcker Rule: A provision in Dodd-Frank designed to limit speculative investments. It effectively bans proprietary trading by depository institutions and restricts trading rights for proprietary traders at other large financial institutions.
Dodd-Frank’s Amendments to Existing Regulations
Dodd-Frank made significant changes to existing regulations in the United States:
- Securities Act of 1933: Dodd-Frank amended Regulation D, exempting some securities from registration and redefined an accredited investor by excluding primary residence from their net worth.
- Securities Exchange Act of 1934: Title IX of Dodd-Frank established the Investor Advisory Committee (IAC), the Office of the Investor Advocate (OIA), and an OIA-appointed ombudsman. They address conflicts of interest in investment firms, mutual fund ads, accountability, executive compensation, and corporate governance. Title IX also created the SEC Office of Credit Ratings and increased mortgage-backed securitization oversight.
- Investment Company Act of 1940: Dodd-Frank introduced new oversight committees and stricter regulations to enhance consumer protections and disclosure policies.
- Investment Advisers Act of 1940: The registration requirements for investment advisors, including independent investment advisors and hedge funds, were affected by Dodd-Frank.
- Sarbanes-Oxley Act of 2002: Dodd-Frank provided additional protections for whistleblowers and introduced financial incentives.
Trump Administration's Impact on Dodd-Frank
Dodd-Frank, which was enacted by former Presidents George W. Bush and Barack Obama, was a significant and controversial measure. Its purpose was to regulate the activities of the financial sector and provide consumer protection. However, in 2018, President Donald Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act, which aimed to ease regulatory burdens on banks established by Dodd-Frank. The act increased the threshold at which banks faced greater regulatory documentation requirements from $50 million to $250 million. The Biden administration hopes to reverse these changes to Dodd-Frank regulations.
Emergency Economic Stabilization Act
In the wake of the 2008 financial crisis, Congress passed the Emergency Economic Stabilization Act to provide financial assistance to troubled assets. The TARP allocated funds to support various institutions, including banks, insurers, and automotive companies. Over time, the Treasury recovered a significant portion of the invested funds from the TARP recipients.
Federal Reserve's Measures
To support the economy and financial markets, the Federal Reserve implemented additional measures after the 2008 financial crisis. They introduced special-purpose instruments for lending to different sectors and established new standards for regular and emergency lending activities. Under Dodd-Frank regulations, the Federal Reserve conducts regular stress testing on banks, aiming to ensure the stability of the banking sector. The stress testing process includes Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act supervisory stress testing (DFAST).
Legislative measures introduced during the 2008 financial crisis played a significant role in stabilizing the economy. Acts like Dodd-Frank and EESA (which created TARP) aimed to monitor financial institutions, protect consumers, and address various aspects of financial regulation and risk management.