Dodd-Frank: What it Achieved, What it Didn’t, and the Overall Process

April 16, 2012
By Ashali Singham MPP 2013

Diana Farrell spoke at the April 12 Regulatory Policy Program (RPP) event, “Financial Regulatory Reform: Innovation in Regulatory Design and Implementation.” Farrell, the director of the McKinsey Center for Government, drew on her experience as the deputy director of the White House National Economic Council to explain the Obama Administration’s approach to financial regulation and its engagement with Congress on the Dodd-Frank Act.

The 2010 Dodd-Frank Act spans several thousand pages and requires hundreds of new regulations and scores of studies in an effort to improve the U.S. financial regulatory regime. Farrell addressed the objectives, means of implementation, and unfinished business of financial regulatory reform.

Farrell’s talk covered three main areas: the objectives and accomplishments of Dodd-Frank, the law’s potential pitfalls, and the complex political and bureaucratic environment shaping debate over the legislation. She surveyed Dodd-Frank’s provisions, including reforms focusing on systemic risk, a broader assessment of and rules for the financial system beyond traditional banking institutions, targeted requirements for the most systemically-important institutions, and protections for investors and consumers.

Farrell also discussed some of the limitations of Dodd-Frank. For example, she addressed the trade-offs between prohibiting Federal bail-outs of some institutions and limiting the flexibility of regulators in a possible future financial crisis akin to 2008. While Dodd-Frank improves coordination among U.S.-based regulators to mitigate (but not completely eliminate) regulatory arbitrage, she noted the difficulty of coordinating international financial regulation. In terms of implementation, Farrell spoke about some of the challenges in terms of personnel, information technology, and other organizational needs that government regulators and the regulated community will need to address.

Farrell also commented on the complexity of the policy, regulatory, and economic landscape in the financial system. With about 20 Federal entities having at least some financial regulatory authority, mirrored by the interests of many Congressional committees with oversight responsibilities of these entities, and the vast array of special interests (and their lobbyists), the Dodd-Frank Act reflected the challenge of reworking financial regulation given significant political and institutional constraints.

The seminar was part of a series of six seminars sponsored this spring by the Regulatory Policy Program at the Mossavar-Rahmani Center for Business and Government. The series explored two themes: the role of cost benefit analysis in regulatory policy and new directions in financial regulation. RPP serves as a catalyst and clearinghouse for the study of regulation across Harvard University. The program's objectives are to cross-pollinate research, spark new lines of inquiry, and increase the connection between theory and practice.

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Picture of Diana Farrell in front of a microphone

Diana Farrell, director of the McKinsey Center for Government