The Short Comings of Dodd-Frank Act

In July, a week before the Dodd - Frank Wall Street Reform and Consumer Protection Act was signed into law, Viral V Acharya, Professor of Finance at Stern School of Business, New York University and co-editor of NYU Stern's forthcoming book "Regulating Wall Street", wrote an article about the failure of Dodd-Frank Act. It appeared in Financial Times and it was considered of great interest because it seems to best explain what the strong and weak points of the Dodd-Frank Act, and all this from the business specialist point of view. Some of the main take a ways from the article are:

First, the Act inadequately discourages individual firms from putting the system at risk. It is not enough to simply wipe out their stakeholders when the cost for the failure of systemically important firms is beyond their own losses. Acharya believes that these firms must pay in advance for contributing to the risk of the system. Acharya also believes the Dodd-Frank Act does not address this and makes the problem worse by requiring other large financial firms pay for the costs. 

Second, the Act falls into the familiar trap of regulating by form rather than function.   For example, under certain conditions the Dodd-Frank Act allows for provision of Federal assistance to bank holding companies, but restricts such assistance to other systemically important firms. The intent of this restriction will be undermined by creating a push for the acquisition of small depositories when non-banks experience trouble.

Third, implicit government guarantees for large parts of the non- depository banks and other financial entities remain unaddressed.   The Dodd-Frank Act makes no attempt at reforming the most glaring examples of systemically important financial firms whose risk choices went awry given access to guaranteed debt, Fannie and the Freddie.  They remain too big to fail.

Entire article can be read at: http://www.ft.com/cms/s/0/ccbb38ea-9010-11df-91b6-00144feab49a,dwp_uuid=81bff92e-b744-11df-839a-00144feabdc0.html#ixzz161H09lKT