Widely considered the most significant financial regulatory reform since the Great Depression, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) instantly became a debated political battle in Washington. Dodd-Frank legislation aims to prevent another disastrous financial crisis such as the financial collapse in 2008.
What Does Dodd-Frank Do?
Dodd-Frank is an effort to cover gaps in financial regulation, regulate the financial markets that played a role in the 2008 financial crisis, regulate commercial bank investments, and increase public confidence in the financial system.
Addressing gaps in financial regulation is the creation of a Financial Stability Oversight Council (FSOC). The council identifies and reduces risks and threats to the entire financial system, putting the responsibility to recommend regulations in the hands of one agency. This aims to prevent threats to the economy from the financial system from “slipping through the cracks” through several different regulators.
One of the markets involved in the 2008 Financial Crisis Dodd-Frank regulates is the Asset backed securities market. Asset backed securities are when a banker wants to sell many mortgages or other assets together as one investment or “security”. Market reforms in this area attempt to prevent bankers from putting together bad mortgages (mortgages that are not likely to be repaid) or other assets into a security and selling them without any consequence if the security fails (the mortgages are not payed).
Dodd-Frank requires that these security bankers retain 5% of the overall risk of the security. This provision strives to correct an area of the financial ...