Testimony on the Dodd-Frank Wall Street Reform and Consumer Protection Act

March 30, 2011

This afternoon, I testified before the House Financial Services Subcommittee on Oversight and Regulation about CBOs cost estimate for the Dodd-Frank Wall Street Reform and Consumer Protection Act. My statement summarizes CBOs estimate for the legislation as enacted last July.

What Did the Legislation Do?

The Dodd-Frank Act made significant changes to the regulatory environment for banking and thrift institutions as well as for financial markets and their participants. The act expanded existing regulatory powers, granted new regulatory powers, and reallocated regulatory authority among several federal agencieswith the aim of reducing the likelihood and severity of future financial crises. The act also established new agencies and programs and provided grants to help communities address high foreclosure rates and subsidies to assist homeowners facing foreclosure.

The Budget Effects in Brief

The figure below summarizes CBOs estimate of the budgetary effects of the legislation during the 2010-2020 period. CBO estimated that the act would increase both direct spending and revenues between 2010 and 2020, reducing deficits, on net, by $3.2 billion. (Direct spending is that which is not governed by appropriation acts.) In addition, CBO estimates that the Dodd-Frank Act will lead to an increase of $2.6 billion in discretionary spending over the five-year period ending in fiscal year 2015 (and additional sums in subsequent years), assuming that lawmakers provide the necessary appropriations in the future.

Certain provisions of the act were estimated to increase director mandatoryspending by $37.8 billion over that period. Most of those costs, $26.3 billion, would result from a new program created to resolve insolvent or soon-to-be insolvent financial entities, which would be financed through an Orderly Liquidation Fund, or OLF. Other provisions would increase spending by an additional $11.5 billion, we expected. At the same time, different provisions of the act were estimated to reduce direct spending by $27.6 billion during the coming decade. The biggest share of those savings, $16.6 billion, would result from changes to federal deposit insurance programs. The remainder of the savings, $11.0 billion, would arise from a decrease in authority for the Troubled Asset Relief Program, or TARP.

CBOs Estimate of the Effects on Direct Spending and Revenues of the Dodd-Frank Wall Street Reform and Consumer Protection Act Over the 20102020 Period

In addition, we estimated that the legislation would increase revenues during the 20102020 period by $13.4 billion. The extra revenues would stem primarily from fees assessed on various financial institutions and market participants.

Major Provisions and their Budgetary Effects

A different way to tote up these same figures is to group the budgetary effects by the provisions of the legislation that generate them. Those provisions:

  • Created new federal organizations to regulate financial matters, including the Consumer Financial Protection Bureau, the Financial Stability Oversight Council, the Office of Financial Research, and the Office of National Insurance. CBO estimated that those new organizations would widen deficits by $6.3 billion over the 2010-2020 period.
  • Restructured the authority of existing financial regulators, including the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, the Office of the Comptroller of the Currency, the Securities and Exchange Commission, and others. Together, those provisions were estimated to add $0.1 billion to deficits, on net, through changes in direct spending and revenues over that period.
  • Provided additional funding for existing programs that provide mortgage relief, neighborhood revitalization, and grants to encourage individuals to move from nonbank financial services to traditional banks. Those provisions were estimated to have a cost of $1.5 billion.
  • Modified federal deposit insurance programs, including increasing the maximum amount of deposits in an individual account that can be insured, and directing the FDIC to increase the size of its insurance fund by 2020. Those changes would reduce deficits by $16.6 billion during the 2010-2020 period.
  • Created the Orderly Liquidation Fund and authorized the FDIC to resolve systemically important financial firms under certain conditions. CBOs estimate of the net cost of those provisions$20.3 billion over the periodrepresents the difference between the expected values of the net costs to resolve insolvent firms and the additional assessments collected to cover those costs. Those expected values represent weighted averages of the outcomes of various scenarios regarding the frequency and magnitude of systemic financial problems, taking into account an estimated probability of each scenario.
  • Reduced the spending authority of the TARP, which we estimated to save $11.0 billion in 2010. And it made a number of other changes to current law that would reduce deficits, on net, by $3.8 billion.

Two Final Points

Once legislation is enacted, the agencys involvement with that legislation is quite limited. New statutes join with the whole body of existing law to form the basis for CBOs baseline projections. Those projections are prepared for programs as a whole, so the effects of individual statutes cannot usually be identified separately. However, we have learned nothing so far, through our review of the Presidents 2012 Budget, about the implementation of the Dodd-Frank Act that would cause us to significantly change the cost estimate we provided last year.

Second, depending on the effectiveness of the new regulatory initiatives and new authorities to resolve and support a broad variety of financial institutions, implementing the Dodd-Frank Act could change the timing, severity, and federal cost of averting and resolving future financial crises. However, CBO did not analyze the regulatory impact of the legislation nor did it attempt to determine whether the estimated costs under the act would be smaller or larger than the costs of alternative approaches to addressing such crises.