How Well Does Dodd-Frank Address Regulatory Gaps and Market Failures that Led to the Housing Bubble?
Adora D. Holstein
Robert Morris University, Dept of Economics & Legal Studies
Journal of Business and Behavioral Sciences, Vol. 25, No. 1, Spring 2013
This study maps key provisions of the Dodd-Frank Act of 2010 against gaps in regulation and market failures that led to the housing bubble, which burst since the Spring of 2006. The creation of one systemic regulator, replacement of ratings by credit rating agencies with an internal rating system, and revision of the banks’ capital requirements to address credit and market risks have the potential to remove the kind of regulatory capital arbitrage that led to excessive leverage during the housing boom, and enable early detection of threats to the financial system. However, liquidity thresholds on banks, limits on the use of short-term funding for long-term assets, and limits on investments in mortgage-backed securities that are meant to transfer risk outside of the banking system, still need to be worked out. Finally, the success of Dodd-Frank hinges on the regulatory philosophy and adequate funding of regulatory agencies.
Number of Pages in PDF File: 12Accepted Paper Series
Date posted: March 27, 2014
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