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Opponents dislike Dodd-Frank because it works

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Former congressman Barney Frank testified before the House Financial Services Committee in July 2014 on the impact of the Dodd-Frank Act.
Former congressman Barney Frank testified before the House Financial Services Committee in July 2014 on the impact of the Dodd-Frank Act.(Win McNamee)

One key goal of the 2010 Dodd-Frank law was to keep financial institutions from becoming too big to fail — and discourage the biggest institutions from taking on too much risk. So when major financial companies shrink to avoid triggering heightened capital requirements and regulatory scrutiny, they’re showing that the law is working as intended.

The Wall Street Journal reported recently that the insurance giant MetLife will reduce its footprint by letting go of a piece of its life-insurance business. Federal regulators have concluded that the insurance giant is a "systemically important financial institution" — essentially, one that is big enough to jeopardize the broader financial system if it collapses and should therefore have to put more money aside just in case. MetLife has concluded that having to do so would keep it from investing in other business activities that it wants to take part in. The company is fighting its designation as systemically important, but will get smaller just in case.

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Good.

In certain parts of the political spectrum, the 2010 regulatory-reform law is routinely depicted as a failure and a symbol of government overreach. Passed in reaction to the global financial meltdown of 2008, the law was designed to discourage the biggest banks from taking on too much risk, lest taxpayers be forced to bail them out again.

The rhetoric in the Republican presidential debates would have Americans believe that Dodd-Frank is somehow doing the opposite of what it intends. Marco Rubio has claimed that banks are bragging about being deemed too big to fail. Jeb Bush once intimated that the law has weakened capital requirements rather than strengthening them. In a debate Jan.14, Bush listed the law among a litany of conservative boogeymen: "Iran, Benghazi, the Russian reset, Dodd-Frank, all the things . . . that have gone wrong in this country."

Wall Street, of course, dislikes the Dodd-Frank law. Maybe, just maybe, the campaign donations that Rubio, Bush, and other GOP candidates have received — or would like to receive — from the financial industry are getting in the way of their ability to perceive the law's effects accurately.

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MetLife isn't the only big firm that's slimming down under pressure from post-Dodd-Frank regulators. Last year, General Electric Corp. sold off most of its financial division, GE Capital, after it was designated systemically important. Citigroup has gotten smaller as well — with no evident harm to its profitability.

Sure, some financial interests may be squawking behind the scenes to Bush, Rubio, and others about how the new law is restricting their freedom of movement. But that was exactly the point. The problem before Dodd-Frank was that big financial firms had every reason to keep getting bigger, but no incentive to take sufficient precautions to protect the financial system against their own failure. Lo and behold, a law designed to address that problem is doing just that.