The financial crisis of 2008, often called the subprime mortgage crisis, caused a contraction of liquidity in global financial markets that originated in the United States due to the collapse of the U.S. housing market and threatened the international financial system.

Several major investment and commercial banks, mortgage lenders, insurance companies, and savings and loan associations failed and precipitated the Great Recession.

In response, Presidents George W. Bush and Barack Obama signed into law several legislative measures to counter the financial crisis, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Emergency Economic Stabilization Act (EESA) which created the Troubled Asset Relief Program (TARP).

Dodd-Frank 

The most influential measure was the Dodd-Frank Wall Street Reform and Consumer Protection Act, which introduced steps designed to regulate the financial sector's activities and protect consumers. Signed into law in July 2010, Dodd-Frank brought sweeping reforms to the U.S. financial sector.

CFPB

Dodd-Frank introduced the Consumer Financial Protection Bureau (CFPB), which has become an important agency monitoring and protecting the financial interests of American consumers.

FSOC

The Financial Stability Oversight Council (FSOC) is addressed in Title I of Dodd-Frank, with its to monitor designated systemically important financial institutions (SIFIs)such as banks, insurance companies, or other financial institutions deemed “too big to fail."

The FSOC’s voting members include the heads of departments such as the Department of the Treasury, the Federal Reserve Board, and the Securities and Exchange Commission. The FSOC requires testing and documentation of the business operations of SIFIs. It can also decide to take action for dividing or reorganizing these institutions in such a way that reduces the overall risk to the economy.

Volcker Rule

One of Dodd-Frank’s provisions, the Volcker Rule, is designed to limit speculative investments. The Volcker Rule has enacted a de facto ban on proprietary trading by depository institutions, also decreasing the trading rights of proprietary traders at other large financial institutions.

Amended Regulations

Dodd-Frank enhanced existing regulations in the United States, including:

• Securities Act of 1933: Dodd-Frank amended Regulation D to exempt some securities from registration and also revised the definition of an accredited investor, removing the inclusion of a primary residence as part of an investor’s net worth.
• Securities Exchange Act of 1934: Title IX of Dodd-Frank requires the creation of an Investor Advisory Committee (IAC), an Office of the Investor Advocate (OIA), and an ombudsman appointed by the OIA to target conflicts of interest within investment firms and on mutual fund advertisements and issues of accountability, executive compensation, and corporate governance. Title IX includes the establishment of the Securities Exchange Commission (SEC) Office of Credit Ratings and oversight of mortgage-backed securitization.
• Investment Company Act of 1940: The Dodd-Frank Act created new oversight committees and tighter restrictions on consumer protections and disclosure policies.
• Investment Advisers Act of 1940: The Investment Advisers Act of 1940 saw changes to the registration requirements for investment advisors, affecting both independent investment advisors and hedge funds.
• Sarbanes-Oxley Act of 2002: Dodd-Frank added new protections for whistleblowers and financial incentives.

Future of Dodd-Frank

In 2018, President Donald Trump passed the Economic Growth, Regulatory Relief, and Consumer Protection Act. This act eased some of the regulatory burdens created for banks through Dodd-Frank, primarily by increasing the threshold at which banks are subject to greater regulatory documentation obligations. The threshold was increased, from $50 million to $250 million. The Biden administration hopes to reverse these easements on the Dodd-Frank regulations.

Emergency Economic Stabilization Act

In October 2008, a divided Congress passed the Emergency Economic Stabilization Act, which initially provided the Treasury with approximately $700 billion to purchase "troubled assets," mostly bank shares and mortgage-backed securities. 

The budget was subsequently reduced to $475 billion and the Troubled Asset Relief Program, as the program was known, ultimately spent $426.4 billion bailing out institutions, including American International Group Inc. (AIG), Bank of America (BAC), Citigroup (C), JPMorgan (JPM), and General Motors (GM). The Treasury eventually recovered $441.7 billion from TARP recipients.

Federal Reserve

The Federal Reserve took extra steps to support the economy and the financial markets during and after the 2008 financial crisis. In addition to implementing monetary policy, primarily the federal funds rate, the Fed also designed special-purpose instruments for lending to various sectors of the market, creating a new standard for the Fed in regular and emergency lending activities.

Under the direction of Dodd-Frank, the Federal Reserve is required to carry out regular stress testing on banks in the banking sector, with provisions in the Dodd-Frank Act on Federal Reserve stress testing found in Title XI. The Federal Reserve conducts two types of stress testing annually: Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act supervisory stress testing (DFAST).

The Bottom Line

The Dodd-Frank Wall Street Reform and Consumer Protection Act and the Emergency Economic Stabilization Act (EESA) which created the Troubled Asset Relief Program (TARP) helped to quell the financial crisis of 2008. The creation of the CFPB and FSOC helps to monitor financial institutions and protect consumers. Key components addressed by these legislative moves include mortgage standards, investor protections, systematic risk, and bank regulation.