Ten years after Dodd-Frank, supporters say the law has helped banks weather the coronavirus

Ten years after the enactment of the financial reform law known as Dodd-Frank, supporters say that its greatest achievement is in protecting the banking system from the disastrous effects of the coronavirus pandemic.

Without the reforms, “this crisis we are going through now would have been far worse,” said Chris Dodd, a former Connecticut senator and one of the original authors of the bill.

The law, passed by Democrats and signed by Barack Obama as a response to the 2008 financial crisis, established a host of new safeguards for banks and new powers for regulators.

“You get down that long list of the provisions in the bill, I think we are in a far better place,” Dodd said during an event hosted by the Brookings Institution at the end of June, citing specifically the stricter capital requirements, the stress testing, and the creation of new oversight entities.

The law, named for Dodd and former Rep. Barney Frank, a Massachusetts Democrat, has “unquestionably enhanced the resilience of the financial system,” said Gregg Gelzinis, senior analyst for economic policy at the liberal Center for American Progress.

The banking system held up well during the early stages of the crisis and was a source of strength for business and households, Gelzinis said, a development that he attributed to the improved capital and liquidity levels that came from the Dodd-Frank Act.

“Despite what some find a convenient fiction, America’s biggest banks supported much of Dodd-Frank and have embraced the structural changes in the bank regulatory system that have made the banking system safer and sounder,” said Greg Baer, president and CEO of the Bank Policy Institute, a major industry trade group.

Banks can’t hold out forever, though. If the economy suffers a double-dip recession, Federal Reserve stress tests show that about a quarter of the big banks would fall below minimum required capital levels and face the danger of collapse, Gelzinis noted. In the worst-case scenario, they wouldn’t be able to offer credit, and businesses and households would face a cash crunch in addition to the income problems the crisis has created.

Defenders of the Dodd-Frank law also say that its successes are imperiled by the Trump administration’s efforts to overhaul it.

The administration’s “outright regulatory rollbacks make it more likely that the banking system’s time as a source of strength will expire before this crisis ends, hindering the economic recovery,” Gelzinis said.

Republicans have sought to roll back or repeal Dodd-Frank, arguing that the regulatory burdens it imposes make U.S. banks less competitive and kill jobs.

President Trump pledged as a candidate to repeal Dodd-Frank and, in May 2018, signed a bipartisan bill rolling back portions of it.

Despite the 2018 changes, Dodd-Frank’s structure remains largely intact. Personnel changes within relevant federal agencies are a far greater threat to Dodd-Frank than changes to the law, according to an analysis by the Brookings Institution.

Dodd-Frank delegated a lot of authority to federal agencies, such as the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation.

“Technically, if you have the right agency leaders, then Dodd-Frank would be more resilient today, but the Trump administration appointees have focused on rolling back the regulatory powers of the law,” said Graham Steele, the director of the Corporations and Society Initiative at Stanford University and former minority chief counsel for the Senate Banking Committee.

Baer at the Bank Policy Institute said that “recent events including a breakdown in market liquidity have revealed serious flaws in the current regulatory system, but those rules were mostly added by regulatory agencies outside the scope of the Act and never envisioned by its congressional drafters.”

Some Republicans have downplayed the importance of Dodd-Frank, saying that banks still would have been in a secure position even if the sweeping law had not been put in place.

“Most of the capital and liquidity requirements and strengthening of the capital requirements of banks and other financial institutions would have happened regardless of Dodd-Frank,” Andrew Olmem, who recently served as deputy director of Trump’s National Economic Council, said during the Brookings event in June. He added that financial regulators were in the process of improving the capital and liquidity requirements of the financial system well before Dodd-Frank had been passed.

However, Federal Reserve Board Governor Lael Brainard, an Obama appointee, said it was clear that Dodd-Frank resulted in banks building stronger capital and improving risk management.

“Those reforms were vital in positioning banks to respond to COVID,” said Brainard at the Brookings event. “And they were able, as a result, unlike the last financial crisis, to continue lending to households and businesses, to work with their customers who need assistance, and to intermediate financial transactions.”