Tuesday's 10th anniversary of the signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act is taking on new meaning because of the COVID-19 crisis, said Dennis Kelleher, president and CEO of non-profit watchdog organization Better Markets.
"It is especially important now to discuss the importance of Dodd-Frank and financial reform as the country copes with a pandemic that has exposed the structural inequalities that are entrenched in the U.S. economic and financial systems," Mr. Kelleher said.
Triggered by the 2008 financial crisis, the law had numerous goals, beginning with preventing future economic meltdowns by looking at systemic risk and putting tighter controls on banks and shadow banking activity. It led to the Volcker rule prohibiting banks from engaging in short-term proprietary trading, and rules requiring centralized clearing of standard over-the-counter interest-rate and credit-default swaps.
It also created the multiagency Financial Stability Oversight Council, whose mission includes assessing the level of risk from asset management firms and other non-banks. Under Dodd-Frank, non-banks that regulators concluded would threaten the financial system if they collapsed were given a SIFI designation, or systemically important financial institution, by the FSOC. The SIFI label brings tough oversight by the Federal Reserve and a series of difficult supervisory exercises, such as stress tests and the submission of strategies for how the companies can be safely wound down in a bankruptcy.
The council's attempts to designate non-banks as significant enough to warrant controls were short-lived. Four non-banks — Metlife, General Electric Capital, American International Group and Prudential Financial — were given the SIFI label after Dodd-Frank went into effect, but none has it today. Most recently, the council rescinded Prudential's designation in October 2018.
In December 2019, the FSOC approved interpretive guidance making it less likely that a non-bank is given a SIFI designation. The guidance emphasizes an activities-based approach — addressing potential risks and threats to U.S. financial stability on a systemwide basis rather than focusing on individual non-banks — and allows primary financial regulatory agencies to take the lead in addressing those risks.
Dodd-Frank also required the Federal Reserve to conduct stress tests on banks. The economic repercussions of COVID-19 were a factor in the Federal Reserve's June 25 decision to ban more than 30 large U.S. banks from stock buybacks and larger dividends to shareholders due to the financial strain of the coronavirus recession. The Fed tested banks' ability to weather two hypothetical scenarios: typical economic conditions and a "severely adverse scenario" such as the pandemic and resulting recession or recovery. Unlike a decade ago, banks have been more resilient, following unprecedented fiscal and monetary stimulus efforts.