Unfortunately, a number of financial institutions behaved improperly while chasing those profits. Mortgage lenders made trillions of dollars of mortgage loans to high-risk borrowers. This spurred builders to build more and more homes, which led to more people with risky credit profiles taking out mortgages — a vicious cycle that led to the creation of the housing bubble. These loans were repackaged into investments called mortgage-backed securities.
Credit-rating agencies rated most of these investments as low risk, because foreclosure rates traditionally have been low. Investors around the world purchased these mortgage-backed securities. Banks had high exposure to the bad mortgages and borrowed heavily against the value of mortgage-backed securities. Eventually the housing bubble burst as supply outpaced demand. When homeowners stopped paying mortgages and started losing homes, a foreclosure crisis ensued and property values tumbled.
This caused millions of investors to lose money, with financial institutions and insurers either going bankrupt or needing bailouts. Measure content performance. Develop and improve products. List of Partners vendors. Named after sponsors Senator Christopher J. Dodd D-Conn. The Dodd-Frank Wall Street Reform and Consumer Protection Act is a massive piece of financial reform legislation that was passed in , during the Obama administration.
The Dodd-Frank Wall Street Reform and Consumer Protection Act—typically shortened to just the Dodd-Frank Act—established a number of new government agencies tasked with overseeing the various components of the act and, by extension, various aspects of the financial system. These are some of its key provisions and how they work:. When Donald Trump was elected President in , he pledged to repeal Dodd-Frank and, in May , the Trump administration signed a new law rolling back significant portions of it.
Siding with the critics, the U. It was signed into law by President Trump on May 24, These are some of the provisions of the new law, and some of the areas in which standards were loosened:.
Proponents of Dodd-Frank believed the Act would prevent the economy from experiencing a crisis like that of and protect consumers from many of the abuses that contributed to the crisis.
Detractors, however, have argued that the act could harm the competitiveness of U. In particular, they contend that its regulatory compliance requirements unduly burden community banks and smaller financial institutions—despite the fact that they played no role in causing the financial crisis. JPM CEO Jamie Dimon also argue that, while each institution is undoubtedly safer due to the capital constraints imposed by Dodd-Frank, the constraints also make for a more illiquid 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 mean banks must keep a higher percentage of their assets in cash, which decreases the amount they are able to hold in marketable securities.
In effect, this limits the bond market-making role that banks have traditionally undertaken. Representative Barney Frank introduced new revisions to the bill in December The legislation was eventually named after the two men.
The Dodd-Frank Act is a comprehensive and complex bill that contains hundreds of pages and includes 16 major areas of reform. Simply put, the law places strict regulations on lenders and banks in an effort to protect consumers and prevent another all-out economic recession. Dodd-Frank also created several new agencies to oversee the regulatory process and implement certain changes. The Volcker Rule forbids banks from making certain investments with their own accounts.
Like many legislative bills, Dodd-Frank has sparked debate among politicians, financial experts and American citizens alike. Supporters of the bill believe its regulations can protect consumers and help prevent another financial crisis. They contend that banks and other institutions were taking advantage of the American people for too long without being held accountable. Others think the regulations are too stringent and put an end to overall economic growth. Critics also say the legislation makes it more difficult for companies in the United States to compete internationally.
In February , President Donald Trump issued an executive order that instructed regulators to review the provisions in the Dodd-Frank Act and compose a report outlining possible reforms. The Republican-led Congress made several efforts in and to roll back some of the consumer-protection provisions found in the Dodd-Frank Act.
Dodd-Frank Act, U. Commodity Futures Trading Commission. The Dodd-Frank Act was a law passed in in response to the financial crisis of and established regulatory measures in the financial services industry. Dodd-Frank keeps consumers and the economy safe from risky behavior by insurance companies and banks.
Over time, the law has been subject to scrutiny and loosening under the Trump administration, but lawmakers agree that the current financial environment due to COVID would be far worse without the preventative measures provided by the law.
Previously, I covered personal finance at other national web publications including Bankrate and The Penny Hoarder. When I'm not digging up the best ways to manage your money, I'm out traveling the world.
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