Login
Copyright

Dodd-Frank Act: Summary & Regulations

Instructor: Michelle Reichartz

Michelle has lead multiple training initiatives and has a master's degree in Business Administration.

In this lesson, you will learn what the Dodd-Frank Act is, its purpose in protecting United States citizens from unfair business practices, and how it enforces the new policies created.

Your First Home

You are getting ready to buy your very first home and preparing to apply for a mortgage. You have a lot of questions about the process and don't know too much about the process. What costs are going to be charged to initiate the mortgage? What will my payment be and can it change in time? What documents should I ask for and what information will be given on them? Is this the best mortgage to go with or do I have a better option?

null

The Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly referred to as the Dodd-Frank Act, exists for this specific purpose. President Barack Obama signed the Dodd-Frank Act in July 2010 for two reasons: minimizing unnecessary risk and creating clearer financial practices.

Minimizing Unnecessary Risk

The United States went through a major financial crisis in 2008. During that time period, it was discovered that a number of financial banks and institutions were making risky decisions for profit, rather than for the best interest of their clients. The crisis pushed the government towards market reforms, such as signing the Dodd-Frank Act. A provision of the Act created a new federal agency known as the Financial Stability Oversight Council.

As a part of the US Department of the Treasury, the Council is focused on creating accountability for financial companies and ensuring they have enough cash available to pay back their customers as needed. If any company is considered too large in size, the Council has the authority to break that company into smaller sized companies. This breaking up reduces the risk of that company's possible failure causing too much of a strain on the economy.

By creating new rules and policies, the Council focuses on ensuring higher standards for these companies to avoid another crisis in the future. Working together to use safe practices in the financial industry, the economy is stronger and better equipped to deal with any future difficulties.

Volcker Rule

In addition to the Council, the Dodd-Frank Act also created what is known as the Volcker Rule. An essential piece to reducing unnecessary risk, the rule restricts the type of investment activities a bank can utilize.

Prior to 2008, banks would utilize a process known as proprietary trading. Proprietary trading is when a bank uses their own capital to profit for their own gain, rather than for their clients. The gains from these trades are significantly higher than the commission they gain from trading for their clients, increasing their profits. Banks were making a number of risky proprietary trades, which led to the collapse of hundreds of banks.

New York Stock Exchange Trading Floor
null

The Volcker Rule eliminates the bank's abilities to use proprietary trading since it does not benefit their clients. In addition, banks have been restricted on their overall ability to provide trading and investment services. They can continue to provide investment services as long as they do not expose the bank to high-risk decisions that could cripple their ability to continue as a financial institution.

To unlock this lesson you must be a Study.com Member.
Create your account

Register for a free trial

Are you a student or a teacher?
I am a teacher
What is your educational goal?
 Back

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back

Earning College Credit

Did you know… We have over 95 college courses that prepare you to earn credit by exam that is accepted by over 2,000 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it free for 5 days!
Create An Account
Support