Dodd-Frank Wall Street Reform Research Articles

Assessing the Impact of Derivatives on the 2008 Financial Crisis and the Effectiveness of Subsequent Regulatory Reforms

The 2008 financial crisis was a global financial catastrophe that reflected the misuse of financial derivatives in financial markets, such as credit default swaps, asset-backed securities and collateralized debt obligations, exposing significant weaknesses in the global financial system. These financial instruments were designed to hedge against debt risk, but their lack of transparency and massive misuse ultimately led to the accumulation of systemic risk that accelerated the financial crisis. Since then, regulatory authorities around the world have realized the necessity for stronger regulatory frameworks, and a series of significant reforms have been implemented, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act in the United States, the European Market Infrastructure Regulation in the European Union, and the Basel III international regulatory framework, with the objectives of increasing transparency in financial markets and improving the risk management measures of financial institutions. This paper will explore the role of derivatives in the 2008 financial crisis and examine the effectiveness of these regulatory measures introduced after the crisis in enhancing stability of financial system.

Modeling and Resolving Uncertainty in DIKWP Model

The paper examines the various uncertainties encountered in high-frequency trading (HFT) environments and delves into the multiple challenges faced by HFT firms in navigating the Dodd–Frank Wall Street Reform and Consumer Protection Act (referred to as the “Dodd–Frank Act”), particularly during the initial stages of its enactment. These challenges include the ambiguity surrounding the definition of HFT, the lack of clarity regarding regulatory requirements and boundaries, inconsistencies in enforcement resulting from deviations in understanding the content, and the absence of detailed descriptions of the Act’s provisions. These hurdles significantly impact not only the daily operations of HFT firms but also pose higher demands on their long-term strategic planning and risk management. Drawing upon the Data, Information, Knowledge, Wisdom, and Purpose (DIKWP) model, this study employs an innovative analytical framework. Through the comprehensive application of Cognitive Space, Concept Space, and Semantic Space, it provides a systematic methodology for identifying and analyzing the aforementioned issues. This approach not only aids firms in better comprehending and adhering to complex regulatory requirements but also enables them to explore new business opportunities and competitive advantages while ensuring compliance.

From the Great Recession to the COVID-19 Pandemic: A Financial History of the United States 2010-2020 —A Comparison of the Government’s Response to the Two Financial Crises that Bookended the 2010 to 2020 Decade

This article compares the government's legislative and regulatory response to each of the two financial crises that bookended the 2010-2020 decade and how the response to the COVID-19 crisis was affected by various provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted in 2010 in response to the 2008 financial crisis. The article concludes with six lessons we learned from these two financial crises experienced in relatively short order: act fast, act with force, act on multiple fronts, regain or retain citizens' confidence in the financial system, ensure access to liquidity, and aid those who are struggling.

Audit committee oversight and bank financial reporting quality

AbstractThis study investigates the impact of audit committee oversight on the financial reporting quality of US bank holding companies. To overcome identification concerns, we use Section 165 h of the Dodd–Frank Wall Street Reform and Consumer Protection Act, which requires publicly traded bank holding companies with assets exceeding $10 billion to have separate audit and risk committees. We utilise a difference‐in‐differences framework where our treatment group comprises bank holding companies that were required to separate audit and risk oversight functions following the introduction of Section 165 h and our control group comprises counterparts that already had separate audit and risk committees prior to the passage of Section 165 h. We estimate the difference in the behavior of treated bank holding companies between the pre‐ and post‐implementation period of Section 165 h with the same difference in the behavior of control group counterparts and find that the separation of audit and risk committees leads to an improvement in financial reporting quality. We attribute the observed improvements in financial reporting quality to the increased focus of audit committees arising from a reduction in the volume and complexity of tasks undertaken following the implementation of Section 165 h.

Cross‐market information transmission along the supply chain network

In this paper, we investigate whether and how investors of suppliers learn from the private information embedded in the customer credit default swap (CDS) market prior to customer earnings announcements. We find that investors of suppliers indeed incorporate the customer private information revealed in the CDS market into the supplier valuation, thereby leading to significant changes in suppliers’ future stock prices. Moreover, such price discovery effect is more pronounced when: (i) the level of customer private information revealed in the CDS market is more prominent; (ii) the customer bond market is more illiquid; (iii) the customers are expected to report bad earnings news or experience deteriorated credit conditions; (iv) the strength of the supplier–customer economic bond is stronger. Our results remain robust when we control for the supplier's own CDS market price discovery effect or conduct matched sample analyses. Finally, utilizing the passage of the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd–Frank Act) as an exogenous shock, we show that the effect of customer CDS trading on suppliers’ future stock prices is less pronounced after the Dodd–Frank Act due to more explicit regulation on informed trading activities. Overall, our study documents significant cross‐market information transmission along the supply chain network (i.e., from the customer derivative market to the supplier equity market).

A Retrospective on the Subprime Crisis and its Aftermath

The paper focuses on researches about 2008 financial crisis. It uses past data and facts to explain the cause, process and aftermath of the event. It is stated that the lack of regulation in financial market enabled banks to release a lot of unqualified financial derivatives to those who were attracted by the seemingly high price of the housing market bubble. However, the rating agencies did not declare the bad quality of these mortgages, leading to more people buying in the bad mortgages while they believed they were safe. When the housing bubble broke, all the bad mortgages and other derivatives could not be paid off, and this caused a huge effect to the whole world. The crisis forced many banks to file for bankruptcy, and the unemployment rate increased noticeably in a number of nations. The Dodd-Frank Wall Street Reform and Consumer Protection Act and the establishment of a capital adequacy ratio for banks to assure their safety are only two of the steps governments have taken to ensure that the crisis doesn't happen again. As can be seen, people today place a high value on understanding the 2008 financial crisis, and a thorough investigation can aid in preventing a similar catastrophe.

The Determinants of Insider Trading in the Credit Default Swap Market-A Network Perspective

Compared to the corporate bond and stock markets, investors prefer the CDS market to implement insider trading since the CDS market is less regulated and trading in this market on their private information is relatively easy without generating great transaction costs. Social networks, board networks in particular, are one of the central features of most economic activities and play an important role in information transmission. Therefore, investors are motivated to make use of the informational advantage gained from well-connected directors in the CDS market. In this paper, we investigate whether and how insider trading in the credit default swap (CDS) market is influenced by the corporate board network, formed by interlocking boards. We use CDS innovation as a proxy for the intensity of insider trading in the CDS market. To estimate the centrality of a firm position in the board network, we use the average quintile ranks of the four commonly used normalized board network centrality measures. We test our hypothesis based on a large sample of U.S. firms from 2004-2014 and find strong evidence that firms with a more centralized position in the board network experience a higher degree of insider trading in the CDS market. Our results suggest that the board network facilitates private information leakage to investors, resulting in more active informed trading in the CDS market. Moreover, such an association is more pronounced for firms with negative earnings news and for firms with weak corporate governance. In addition, using the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) as a quasi-natural experiment, we document that insider trading becomes less active after the passage of the Dodd-Frank Act. Our results still hold when we repeat the baseline analysis using four centrality measures separately or when controlling for the number of banking relationships. Our results add both to the insider trading literature and the social networks literature by examining the relationship between board network centrality and insider trading behavior in the CDS market. The findings indicate that board networks could serve as a relationship network that transmits private information to outside investors.

Subprime Crisis: Cause, Effect and Response

After the dot-com bust, the U.S. experienced growth in the housing industry: oversupply of capital, low-interest rates, and deregulated financial system. Financial firms, led by banks, rode on a robust macroeconomic atmosphere. The freedom brought by financial deregulation was taken out of context among the firms in the financial system, resulting in the establishment and widespread use of collateralized debt obligations (CDOs) and mortgage-backed securities (MBS) (CDO); these were unconventional investments for the general populace. In retrospect, the U.S. government limited banks’ participation in private-labeled asset-backed securities to tame interest rates, liquidity, and credit risks only to be loosened the following years by Congress through amendments to the existing laws. Deregulation of the banking system encouraged banks and thrift banks to engage in real estate businesses, which paved the way for the rise of the subprime market. The subprime market grew alongside the prime market due to banks’ circumvention of borrowers' creditworthiness. The domino effect began from the failure of the subprime borrowers to repay. Vertically integrated banking giants felt the heavy blow of loan default, which caused their insolvency. Since then, the whole financial system has collapsed entirely. An increase in job losses, a rise in homelessness, business closures, and U.S. negative growth ensued. Through the TARP program, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and quantitative easing.

Quantitative Analysis of the Impact of The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 on the Cost of Regulatory Burden on Community Banks

Following the financial crisis of 2007-2008 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) was enacted. Community bankers protested that they did not contribute to the crisis but had been penalized more than the large banks because they (large banks) had the compliance personnel and resources to respond effectively to Dodd-Frank. After seven years, Congress passed the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Relief Act) to relieve the regulatory burden on community banks. This study examines whether the Relief Act had the intended effect of reducing the regulatory burden on community banks. I find that the Relief Act did indeed reduce the cost of the regulatory burden on community banks, contrary to community bankers’ survey responses. This study benefits regulators, bankers, and legislators.

Dodd-Frank and unlimited deposit insurance

This paper is the first to examine the unlimited deposit insurance on noninterest-bearing transaction accounts (NIBTAs) provided by Section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. During Dodd-Frank, banks had a smaller ratio of NIBTAs compared to later periods without the unlimited insurance but have larger deposit flows in NIBTAs over the $250,000 FDIC limit. The results suggest that depositors took advantage of the unlimited insurance, but that banks were not harmed by drawdowns when the insurance expired. Furthermore, the results suggest that emergency deposit insurance might be a complement to FDIC insurance during recessionary times.Anna-Leigh Stone: Conceptualization, Methodology, Software, Data Curation, Writing – Original Draft, Writing – Review & Editing

Before and After the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018

The Dodd-Frank Wall Street Reform and Consumer Protection Act became law on July 21, 2010. The law was enacted to provide at least a modicum of regulation to the financial industry following the recession of 2008, leading to what some called the worst economic downturn in the United States Economy since the Great Depression. On May 24, 2018, President Trump signed S. 2155, The Economic Growth, regulatory relief, and Consumer Protection Act (the Relief Act). Many believe this new law put an end to Dodd-Frank. Others believe the new law did nothing to repeal and replace Dodd-Frank. In a prior study, the authors asked community bankers, “How will your day-to-day activities change if Dodd-Frank is repealed?” This paper follows up with a survey of community bankers to determine if S. 2155 had the expected results. This study finds that the Relief Act did not have the anticipated impact.

A Study on the Protection System for whistleblowers in U.S.A

최근 국민권익위의 보도자료(2021. 7. 6)에 따르면 지난해 공공기관은 약 330만 건의 공익신고를 접수했고 약 2,315,149건에 대한 혐의가 확인돼 행정처분되거나 수사기관에 송부‧송치됐다고 한다. 혐의가 확인된 피신고자에게는 총 2,915억 원의 과징금‧과태료 등이 부과됐다고 한다. 또한 지난해 공공기관에 접수된 공익신고 건수는 「공익신고자 보호법」이 제정된 2011년 418,182건에 비해 약 8배 증가한 것이다. 이러한 통계는 이제 공익신고자 보호제도는 더욱 청렴한 사회를 만들기 위한 유용한 도구라는 것이 우리 사회에 널리 인식되고 있다는 것을 보여 주고 있다. 이는 우리 사회에서 공익신고자의 보호 문제는 진부한 것이 아니고 여전히 사회적으로 큰 파장을 일으키는 사안임을 여실히 보여주고 있다. 또한 해외 각국에서도 지속적이고 효과적인 공익신고자보호를 위해 계속 관련 법률들을 입법하거나 개정하고 있는 사정에 있다. 본 연구는 이러한 배경 하에서 합리적인 공익신고자 보호를 도모하기 위한 필요성에서 시작되었다고 할 수 있다. 특히 본 연구에서는 미국의 공익신고자 보호 법률에 대해 살펴보고자 한다. 미국에서는 공익신고자 보호를 위한 단일 법률은 존재하지 않고 개개의 법률에 의해 당해 분야의 공익신고자 보호에 관한 규칙이 정해져 있다. 미국의 법 제도상 연방법 및 주법이 존재하지만 본 연구에서는 연방 법률을 연구 대상으로 하고자 한다. 그 주된 연구대상 법률은 다음과 같다. ◦ SOX법(Sarbances-Oxley Act of 2002) ◦ 도드-프랭크 법(Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010) ◦ 내부고발자보호법(Whistleblower Protection Act of 1989) 및 내부고발자보호강화법(Whistleblower Protection Enhancement Act of 2012) ◦ 부정청구방지법(Federal False Claims Act of 1986)

TEN YEARS OF WHISTLEBLOWER PROTECTIONS AND AWARDS

ABSTRACT Whistleblowing plays an important role in various aspects of society. In the United States, the Securities and Exchange Commission's Office of the Whistleblower has been providing both awards and protections for whistleblowers who report potential securities laws violations for more than 10 years. Since its inception in 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, it has awarded more than $900 million in whistleblower awards, with the first whistleblowing award being made in 2012. The individuals who report the suspected wrongdoing to the SEC are protected from retaliation by their employer and the SEC does not publicly release the names or identifying information about whistleblowers. In September, 2020, the Securities and Exchange Commission adopted amendments to the rules of the whistleblowing program. The goal of the amendments was to enhance clarity, efficiency and transparency to the whistleblower award program. This paper discusses the recent amendments as well as some recent high dollar awards. The US SEC Whistleblower Program is also compared to the recently adopted EU Directive on Whistleblower Protection in Europe. Recommendations for future research on whistleblowing are provided. Keywords Whistleblowing, hotlines, SEC

Enforcement against the Biggest Banks

ABSTRACT Being a big bank means the regular payment of huge fines to a number of different regulators, paired with profuse apologies, and promises to do better next time. This article makes use of a hand-collected dataset to show how this enforcement worked in the United States after the passage of the Dodd-Frank Wall Street Reform Act. American regulators have tended to hunt the big banks in packs, with multiple regulators pursuing fines against financial institutions for the same misconduct. Regulators frequently enforce in a ‘viral’ manner: once they sanction one bank for a type of misconduct, the chances that they will sanction another bank for the same sort of misconduct increases. Some regulators like to bundle a variety of different unlawful actions by banks into one global settlement. Enforcement by the Department of Justice can result in spectacularly expensive settlements compared to the level of enforcement by primary banking regulatory agencies; overall, Department of Justice sanctions in dollars dwarf those of all other agencies policing part of what a bank does. American enforcement, despite suspicion to the contrary, does not appear to protect domestic banks and discriminate against foreign ones. Although this article’s primary goal is to make sense of the federal government’s overall enforcement practices, one recommendation is made: criminal prosecutors should consult with safety and soundness regulators before unveiling indictments and settlements against banks.

Mandatory Disclosure for Ethical Supply Chains: A Conflict Mineral Case Study

Mandatory disclosure requirements for corporate supply chains have the potential to leverage consumer and investor sensibilities to incentivize corporations to source more ethically. Despite their growing prevalence, there are few empirical studies of their effects: whether they actually put pressure on companies remains untested. This Article supplies such evidence by examining the consumer and investor responses to corporate supply chain disclosures made pursuant to Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The act requires publicly traded companies to disclose to the Securities and Exchange Commission whether their supply chain contains “conflict minerals” (minerals important in global supply chains whose sourcing supports the conflict in the Democratic Republic of Congo and surrounding areas). The law aims to give customers and investors information about corporate supply chains, with the hope that they will support companies that source responsibly and punish those that do not. But whether this is actually accomplished is an open question. This Article provides an empirical study of the market responses to three years of Section 1502 disclosures, whose contents were coded to create a novel dataset. Disclosures implying that a company has a higher risk of contributing to the conflict are associated with higher revenues and stock performances than those implying a lower risk. This implies there is no market discipline of bad actors in response to the disclosures; instead, bad actors are rewarded. This is consistent with the finding that the number of companies reporting a higher risk of contributing to the conflict through their supply chains did not decrease over the three years. One potential explanation is that consumers and investors may read disclosures more for signals of a corporation’s honesty or profit-maximization skills than for information about conflict-minerals exposure, and firms disclosing a higher risk of this exposure are more likely to be honest and profit seeking. Because disclosures about supply chains will generally send these signals as well, expecting investors or consumers to discipline the supply chains in response to securities disclosures is unrealistic. But scores for the due diligence procedures and forward-looking commitments in the disclosures generated by an NGO for a subset of the companies are positively correlated with revenues, suggesting how mandatory disclosure regimes might be improved. The NGO’s success in disseminating and analyzing the information suggests that the SEC may not be the best actor for implementing supply chain disclosure requirements and the criteria for the scoring suggest that disclosure requirements should focus more on the reporting of processes so that they are less likely to send a signal about honesty.

Is Dodd-Frank the Biggest Law Ever?

ABSTRACT The passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 continued a trend toward lengthier and more complex acts of Congress. In this article, we use novel metrics of the size, scope, and complexity of acts of Congress to assess Dodd-Frank’s place in this trend. Our analysis is consistent with the hypothesis that, in terms of its regulatory effects, Dodd-Frank is the biggest act of Congress in recent history and may become the biggest ever. We argue that this trend toward longer and more complex laws can cause deterioration in the quality of the regulations the laws authorize for two procedural reasons. First, a large act can create a regulatory surge that overwhelms the quality control process. Second, because a large act can precipitate the creation of many regulations by different agencies that target the same industry, the agencies create rules in relative ignorance of their potential interactions.

The Impact of Federal Home Loan Bank (FHLB) Advances on Small Business Lending by Community Banks—2010–2016

Abstract In this paper, we examine the relationship between small business loan growth and growth in core deposits and Federal Home Loan Banks (FHLBs) advances from 2010 to 2016. Controlling for other effects, we find that the relationships between small business loan growth is positively and significantly related to both FHLB advance growth and core deposit growth, with the coefficient on advance growth being significantly larger than the coefficient on core deposits over the entire sample period. We also tested whether this relationship changed after 2014:3 reflecting the Federal Reserve’s relaxation of the regulatory burden on smaller banks. We find that the relationship between loan growth and core deposit growth became more positive after the change, but the relationship between loan growth and FHLB advance growth did not. As a result, we could no longer reject the hypothesis that the coefficient on core deposit growth was equal to the coefficient on FHLB advance growth after 2014:3. This provides some empirical support that the regulatory changes in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (DFA) influenced small business lending by strengthening the impact of the growth in core deposits on the growth of small business lending, complementing the work of Bordo and Duca (2018) that changes in DFA had some unintended negative consequences for lending to small businesses. It also suggests that lowering the regulatory burden faced by community banks (which have a larger proportion of core deposits to total assets than non-community banks) could improve the incentive to increase small business lending. It also implies that FHLB advances remain an important funding tool at the margin to give commercial banking organizations greater liquidity and flexibility in funding their balance sheets.

The Impact of Sarbanes–Oxley and Dodd–Frank Legislation on Loan Loss Provisioning in US Banks

The Sarbanes–Oxley Act (SOX) of 2002 and the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act (DFA) were passed to address weaknesses in the internal control environment of the firm. Elements of these Acts reduce risky behavior of financial institutions by reducing informational asymmetry with borrowers. An important element of managing earnings quality in financial institutions is the loss provision, an annual expense set aside for uncollected loan and lease payments. These Acts affect the selection of loss provision expense levels in distinct ways. Using a dataset of community bank financial information observed between 1998 and 2017, it is shown that banks experience a complementary effect between SOX and DFA on loss provision expenses. Improved governance procedures to establish policy responses to nonperforming loans result in reduced expenses, whereas reduced information asymmetry tends to enhance a moral hazard effect. These results show that incentives for firm growth, income, capital, and loan specialization under the SOX and DFA regulatory environments complicate the loan risk management process.

Volcker Rule in Practice

Established as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Volcker Rule’s restriction of banks and financial companies from participating in proprietary trading was conceived of as a response to the systemic institutional failures that are commonly noted to be partially responsible for the financial crisis of 2008. Over its short and contentious lifetime, the Rule has been widely praised by some as a necessary step toward limiting unsustainably risky corporate investment practices, and widely vilified by others as being poorly drafted, impracticably restrictive, and only tenuously connected to the crisis precipitating its enactment. The conspicuous disunity among participants in this discussion reflects, in part, the difficulty of measuring the direct impact that the Volcker Rule has had since its enactment, particularly given the complexity of the investment activities the Rule attempts to regulate and the dearth of conclusive statistics indicating which phenomena are accurately attributable to the Rule’s interference.
 Through a survey and analysis of the public’s input and assessment of the Volcker Rule and its more recent development, this Note explores how administrative processes have fared in giving an adequate voice to the various viewpoints of affected private citizens, businesses, and public entities. Ultimately, this Note argues that the Volcker Rule’s surprisingly modest evolution to date is overshadowed by charged rhetoric, vast information gaps, and unbalanced regulatory feedback rather than substantive bilateral exchange—a phenomenon frustratingly typical of the democratic processes in the context of complex financial reform. This Note concludes by offering reflections on the Volcker Rule’s evolution to date and what the data examined has to say about the successes and shortcomings of the lawmaking processes driving that evolution forward.

The Unfinished Business Of Regulating Clearinghouses

Financial derivatives have been widely blamed for causing the 2008 financial crisis. These complex instruments created a deep and opaque web of bilateral links between major financial institutions that contributed to the transmission of systemic risk throughout financial markets. In order to stabilize the derivatives markets, legislators included radical provisions in the Dodd-Frank Wall Street Reform Act of 2010. As a result, traders are now required to process derivatives through clearinghouses: specialized risk managers that act as middlemen between buyers and sellers and guarantee each party’s performance.
 Policymakers believed that clearinghouses would provide much-needed stability in derivatives markets by acting as designated systemic risk managers. However, this Article argues that the effect of clearinghouses on systemic risk is less clear-cut than scholars and policymakers have generally believed. While clearinghouses have removed much of the financial risk from markets, they have simultaneously concentrated it within their own walls. Yet, these walls stand on fragile foundations: the economic and governance incentives of clearinghouses and their stakeholders are misaligned, which could undermine their systemic resilience.
 This Article contends that the current regulatory framework has critical, overlooked flaws that exacerbate clearinghouses’ moral hazard while creating new, risky, too-big-to-fail institutions. It urges policymakers to intervene: in order to rectify this situation, financial regulators must do more to ensure that clearinghouses are bastions of financial stability and not systemic risk amplifiers. The implementation of a multi-stakeholder board and the creation of hybrid financial instruments to complement the capital structure of clearinghouses are the first steps toward enhancing the accountability and systemic resilience of these critical market infrastructures.