The Dodd-Frank Wall Street Reform and Consumer Protection Act: Accomplishments and Limitations

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is widely described as the most ambitious and far-reaching overhaul of financial regulation in the United States since the 1930s. Together with other regulatory reforms introduced by regulatory agencies globally, the Act aims to put an end to the too-big-to-fail problem and is expected to alter the structure of financial markets in profound ways. This article provides an overall assessment of the Act in three different ways: first, in light of first economic principles, or how theory suggests we should regulate the financial sector, given the systemic risk externality each financial firm imposes on other firms and the rest of the economy; second, from a comparative perspective that views the proposed reforms in relation to those undertaken in the 1930s following the Great Depression; and, finally, in the form of an assessment of how the proposed reforms would have fared in preventing and dealing with the crisis of 2007-2009 had they been in place at the time. The article also highlights key areas that are left wholly or partly unaddressed by the Dodd-Frank Act-notably, the pricing of explicit and implicit government guarantees; dealing with inevitable opportunities for the financial sector to engage in regulatory arbitrage; and containing the systemic risk arising from collections of small institutions and markets such as money market funds and repo contracts.