The Dodd-Frank Act: Systemic Risk, Enhanced Prudential Regulation, and Orderly Liquidation

This paper analyzes the first two titles of the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in 2010. These titles deal with financial stability, enhanced prudential regulation, and more orderly and less costly resolution of large, troubled bank holding companies and non-bank financial institutions, and attempt to eliminate “too-big-to-fail” in banking and finance. The paper concludes that while in the near-term Dodd-Frank will probably reduce both risk in banking and the magnitude of financial intermediation, it is unlikely to do so in the longer term. Like nearly all major banking legislation in the United States before it, Dodd-Frank promises more than it is likely to deliver. It devotes insufficient attention to both economic incentives and continued innovations in technology and banking practices. Through time, the result should be the emergence of a financial system much like the pre-2007 system, with renewed fragility.