From the U.S. Government Accountability Office, www.gao.gov Transcript for: The Financial Crisis and the Impact of Dodd-Frank Description: Audio interview by GAO staff with Nikki Clowers, Director, Financial Markets and Community Investment Related GAO Work: GAO-13-180: Financial Regulatory Reform: Financial Crisis Losses and Potential Impacts of the Dodd-Frank Act Released: February 2013 [ Background Music ] [ Narrator: ] Welcome to GAO's Watchdog Report, your source for news and information from the U.S. Government Accountability Office. It's February 2013. The recent financial crisis threatened the stability of the U.S. financial system and the health of the economy. Congress enacted the Dodd-Frank Act in an effort to address regulatory gaps and other problems revealed by the crisis. A team led by Nikki Clowers, a director in GAO's Financial Markets and Community Investment team, recently reviewed the losses associated with the crisis, as well as the benefits and costs of the act's reforms. GAO's Jeremy Cluchey sat down with Nikki to talk about what they found. [ Jeremy Cluchey: ] We spoke back in December about agency rule-making under Dodd-Frank. This new report looks more broadly at the financial crisis and the impact of the act itself. And one of the things your team looked at in particular was the financial losses that were associated with the crisis. Can you talk a little bit about what you found there? [ Nikki Clowers: ] While there are a number of ways to examine the cost of the financial crisis and the cost estimates may vary based on the assumptions used, we found that the cost of the recent crisis is greater than any past crisis since the Great Depression. There are a number of ways to think about the cost of the financial crisis. The most commonly used metric is losses or economic output losses. And what we found is that, again depending on the assumptions used, those losses can range from a few trillion dollars to over ten trillion dollars. Federal Reserve data indicate that the median household net worth dropped by almost $50,000 during the most recent financial crisis, and that was largely due to declines in home prices which is associated with another potential cost of the financial crisis which is the number of foreclosures. That has increased significantly in the recent years, which has impacts not only for the homeowner and the lender associated with that house, but as well as the neighborhood and local communities that must deal with these foreclosures and the vacant properties that they create. [ Jeremy Cluchey: ] You also reviewed the benefits of the Dodd-Frank Act for the financial system as well as for the economy. What did you find there? [ Nikki Clowers: ] The Dodd-Frank Act is intended to strengthen the financial services sector by introducing a number of reforms, and the reforms are largely driven based on the problems that were highlighted or emerged as problems during the most recent financial crisis. For example, the act created the Financial Stability Oversight Council. The act also created the Consumer Financial Protection Bureau. The act also created the Office of Financial Research. There's other reforms as well. For example, financial institutions will be required to hold more capital. The recent crisis showed that institutions were not holding sufficient capital to absorb the losses. The act also created—granted new authority to help the federal government unwind or resolve failing financial firms in an orderly manner. We found that there was no clear consensus among experts about the extent to which the act will achieve all these benefits, but we did find that many experts felt as though at least some of the provisions could achieve their intended benefits and there was some consensus around certain provisions like the increased capital levels. [ Jeremy Cluchey: ] And in terms of the costs created by the act's reforms, what did they look like? [ Nikki Clowers: ] So we put the costs in three different categories. First, there's the cost to the federal government. Federal regulators are expending resources to implement the reforms. However most of the regulators charged with implementing the reforms do not receive appropriation so there's not a large impact to the federal budget. Second, there's the compliance costs and other costs that are associated with implementing the rules, and these will be borne by the financial institutions. We found that there's no comprehensive data on compliance costs. However some experts believe that compliance costs could be large while others note that these costs represent the act forcing institutions to internalize the risk that they had posed to the financial system. Third, there's the economic costs of that. Some of the reforms, as the financial institutions are implementing those reforms, they’ll pass those costs on to consumers. However these are also very difficult to quantify. [ Jeremy Cluchey: ] Finally, for taxpayers interested in better understanding this most recent financial crisis as well as Dodd-Frank's role in responding to it, what's the bottom line here? [ Nikki Clowers: ] Because the costs associated with the financial crisis can be large, into the trillions of dollars, the act might need to reduce the probability of the crisis by only a small fraction for the benefits to outweigh the costs. Whether the act can achieve this outcome is unknown, in part because a number of the reforms remain in progress. More will be known about the benefits and costs of the Dodd-Frank Act as regulators continue to implement them. [Background Music] [ Narrator: ] To learn more, visit GAO.gov and be sure to tune in to the next episode of GAO's Watchdog Report for more from the congressional Watchdog, the U.S. Government Accountability Office.