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Knowledge Base

The Danger of Regulatory Capture

What is the Dodd-Frank Act?

The Dodd-Frank Act, officially called the Dodd-Frank Wall Street Reform and Consumer Protection Act, is a legislation signed into law by President Barack Obama in 2010 in response to the financial crisis of 2007. The legislation regulated the financial industry and created programs to stop mortgage companies and lenders from taking advantage of consumers. However, it had an unintended consequence of making it much more difficult for new banks to form and ultimately compete with the biggest financial firms.

Can we restrain regulatory capture?

Dealing with regulatory capture is difficult. While we can’t avoid lobbying in a democracy since industries have the right to explain their case to the government, the best thing is to keep the regulatory rules simple and transparent so that it is clear if an industry is getting favors. Moreover, reducing government subsidies to private firms can go a long way in reducing regulatory capture, as well as avoiding over-regulation.