What Is Dodd-Frank Act?
The landmark 2010 financial reform law enacted after the financial crisis that strengthened bank regulation, created stress testing, and established the Consumer Financial Protection Bureau.
How It Works
The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law in July 2010, was the most sweeping financial regulation since the New Deal era. It was enacted in response to the 2008 financial crisis and aimed to prevent future bailouts by addressing the systemic risks that had been allowed to build in the banking system.
Key provisions relevant to bank safety include: mandatory stress testing for large banks, the Volcker Rule (which restricts banks from proprietary trading), enhanced capital and liquidity requirements, the creation of the Consumer Financial Protection Bureau (CFPB), the establishment of the Financial Stability Oversight Council (FSOC) to identify systemic risks, and the Orderly Liquidation Authority (which provides a framework for winding down failing financial firms without taxpayer bailouts).
Dodd-Frank also raised the minimum Deposit Insurance Fund reserve ratio to 1.35% and made the $250,000 FDIC insurance limit permanent (it had been temporarily raised from $100,000 during the crisis). The law required large bank holding companies to submit resolution plans ("living wills") showing how they could be wound down in an orderly manner.
For depositors, Dodd-Frank's most visible impact is the increased transparency and capital requirements that make the banking system more resilient than it was before 2008. The stress testing regime, in particular, has forced the largest banks to maintain higher capital buffers. While some provisions have been modified by subsequent legislation (the 2018 Economic Growth Act raised the stress testing threshold from $50 billion to $250 billion in assets), the core framework remains in place.
Related Terms
Stress Test
A regulatory exercise that simulates severe economic scenarios to determine whether a bank has enough capital to survive a crisis.
Too Big to Fail
The concept that certain financial institutions are so large and interconnected that their failure would cause catastrophic damage to the broader economy.
Community Reinvestment Act
A federal law requiring banks to serve the credit needs of their entire community, including low- and moderate-income neighborhoods.
Prompt Corrective Action
The regulatory framework that requires banking agencies to take increasingly severe enforcement actions as a bank's capital falls below specified thresholds.