Economics: The Financial Reform Bill

This article contains a short summary of a slightly preliminary version of the recently passed bill.

It is touted as the biggest overhaul of American finance since the Great Depression. The 2,319-page Dodd-Frank Wall Street Reform and Consumer Protection Act, now nearing the end of its odyssey through Congress, tackles almost every aspect of American finance from municipal bonds to executive pay. Its success, however, rests on a simple question: does it make another crisis significantly less likely?

The reform does make progress in three critical areas: regulatory oversight, derivatives and dealing with troubled banks that are too big to fail. Yet by itself, this bill, whose passage in the Senate is still not quite secure, is an incomplete remedy (see article). Much depends on how American regulators implement its provisions. Congress left several meaty matters for later, including the crippled mortgage giants, Fannie Mae and Freddie Mac. And even more is riding on how the Basel club of international banking supervisors compel banks to raise their buffers of capital and liquidity.

For more, see A Decent Start July 1, 2010, at The Economist.