Two Years Later: 5 Ways Wall Street Reform Has Strengthened America’s Markets

Our guest blogger is Jennifer Erickson, Director of Competitiveness and Economic Growth at the Center for American Progress Action Fund.

President Obama signed Dodd-Frank into law two years ago tomorrow.

Saturday marks the two year anniversary of the Dodd-Frank Wall Street reform law. The landmark suite of reforms were designed to fix a broken financial system following a crisis that cost America 10 million jobs and $17 trillion in household wealth.

Two years later there is still more to be done — there always will be with a task this big — but it is worth pausing to reflect on five ways our markets are stronger now than they were before Dodd-Frank:

A consumer watchdog is now on the beat. There is now an agency devoted solely to protecting consumers. Just this week the Consumer Financial Protection Bureau scored its first high-profile win by calling Capital One’s deceptive marketing practices to account, returning $140 million to customers and fining the credit card giant $25 million.

Every financial institution must now play by the rules. Before, “nonbank financial institutions,” ranging from small payday lenders to massive too-big-to-fail investment banks, were outside the scope of regulation and could play by different rules. Dodd-Frank changed that.

Increased capital requirements are now in place. Before the crisis many banks were grossly overleveraged, like Lehman Brothers, which had $1 in equity for every $30 it was borrowing when it failed. When banks didn’t have the capital to cover their losses, taxpayers were forced to pick up the tab. Dodd-Frank mandates they have sufficient capital to withstand another crisis.

Regulators now have the authority to wind-down failing institutions. Large banks and nonbank financial institutions now have to submit “living wills” describing how they would facilitate an orderly wind-down in the event of failure. Under the process, management is fired and shareholders bear the losses — not the taxpayer.

New rules will help rein in executive compensation. In 1980, CEO pay relative to average worker pay was 42:1. By 2011, it was 380:1. And as Warren Buffett noted, “In the half a dozen financial institutions that needed help the most during the crisis, that were too big to fail… the managers which led them into the trouble in all cases went away very, very wealthy.” Dodd-Frank calls for say-on-pay votes which allow shareholders to vote on executive compensation plans at least once every three years.

Dodd-Frank started an important job in keeping American markets — and American citizens — safer. A recent poll showed that “voters favor the Dodd-Frank financial reform law by a 53-point margin” of 73-20.

Click here to read about five concrete things that must be done to further bring common sense regulation to the nation’s financial markets.