Research suggests that U.S. output losses associated with the 2007- 2009 financial crisis could range from several trillion to over $10 trillion. 2007-2009 Crisis Was Also Associated with Large Declines in Employment, Household Wealth, and Other Economic Indicators

While studies often use output losses to measure the overall costs  associated with financial crises, many researchers also discuss trends in  unemployment, household wealth, and other economic indicators, such  as the number of foreclosures, to provide a more granular picture of the  effects of financial crises. Factors contributing to these challenges include decreased  tax revenues from reduced economic activity and increased spending  associated with government efforts to mitigate the effects of the  recession. The Dodd-Frank Act May Enhance Financial Stability and Provide Other Benefits, with the Extent of the Benefits Depending on a Number of Factors

The Dodd-Frank Act contains several provisions that may benefit the  financial system and the broader economy, but the realization of such  benefits depends on a number of factors. Several Dodd-Frank Provisions May Help Reduce the Probability or Severity of a Future Crisis, but Uncertainty Exists about Their Effectiveness

Through our review of the literature and discussions with a broad range of  financial market regulators, academics, and industry and public interest  group experts, we found no clear consensus on the extent to which, if at  all, the Dodd-Frank Act will help reduce the probability or severity of a  future financial crisis. In addition, a few experts with whom we spoke said that some of  the act’s provisions could increase systemic risk and, thus, have adverse  effects on financial stability. FSOC is  authorized, among other things, to  collect information across the financial system from member agencies  and other government agencies, so that regulators will be better  prepared to address emerging threats; designate certain nonbank financial companies for supervision by the  Federal Reserve and subject them to enhanced prudential standards; designate as systemically important certain financial market utilities  and payment, clearing, or settlement activities, and subject them to  enhanced regulatory oversight;  recommend stricter standards for the large, interconnected bank  holding companies and nonbank financial companies designated for  enhanced supervision;  vote on any determination by the Federal Reserve that action should  be taken to break up a SIFI that poses a “grave threat” to U.S.  financial stability;  facilitate information sharing and coordination among the member  agencies to eliminate gaps in the regulatory structure; and make recommendations to enhance the integrity, efficiency,  competitiveness, and stability of U.S. financial markets, promote  market discipline, and maintain investor confidence. Quantifying Potential Benefits Is Difficult, but Some Approaches May Provide Useful Insights

The Dodd-Frank Act’s potential benefit of reducing the probability or  severity of a future financial crisis cannot be readily observed and this  potential benefit is difficult to quantify. Nonetheless, as  we noted previously in this report, a working group of the Basel  Committee on Banking Supervision summarized several studies that  analyze the costs of financial crises, and that used different  macroeconomic models of the economy to estimate the impact of more  stringent capital and liquidity standards on the annual likelihood of a  financial crisis, and the benefits of avoiding associated output losses. Significance of the Act’s Costs Is Not Fully Known

The Dodd-Frank Act requires federal agencies and the financial services  industry to expend resources to implement or comply with its  requirements, and some of its reforms are expected to impose costs on  the economy. First, federal agencies are devoting resources to fulfill rule-  making and other new regulatory responsibilities created by the act. For example, financial institutions may  charge their customers more for credit or other financial services. In such cases, these  new funding resources do not represent an incremental cost of the act’s  implementation. A large portion of the federal entities’ resources devoted to the act’s  implementation are funded by fees paid by regulated institutions or other  sources outside the congressional appropriations process, limiting the  impact of these activities on the federal budget deficit. According to some academics and others, certain types of costs imposed  by the act on financial institutions serve to make such institutions  internalize costs that they impose on others through their risk-taking and  thereby reduce the risk that they pose to the financial system. Regulators and others have collected some data on certain compliance  costs. Although the Dodd-Frank Act reforms are directed primarily at large,  complex U.S. financial institutions, many of the act’s provisions are  expected to impose costs on other financial institutions as well. Many of  the rules implementing the act’s reforms have not been finalized, and it is  difficult to predict how regulated institutions will respond to the act’s  reforms. The Potential for Unintended Consequences Adds to Challenges of Assessing Benefits and Costs

Academics, industry representatives, and others we spoke with also have  expressed concern about the potential for the Dodd-Frank Act’s reforms  to have unintended consequences that could harm U.S. economic growth  or the global competitiveness of U.S. financial markets. Experts have a  wide range of views on the act’s potential to enhance financial stability,  with some maintaining that certain reforms could make the financial  system more vulnerable to a crisis. All of the agencies provided technical comments,  which we have incorporated, as appropriate. Appendix I: Objectives, Scope, and Methodology

The objectives of our report were to examine what is known about (1) the  losses and related economic impacts associated with the 2007-2009  financial crisis; (2) the benefits of the Dodd-Frank Wall Street Reform and  Consumer Protection Act (the Dodd-Frank Act), particularly its key  financial stability provisions, for the U.S. financial system and broader  economy; and (3) the costs associated with the act, particularly its key  financial stability provisions. In  addition, we reviewed relevant reports and public statements by federal  financial regulators, industry associations, and others. We obtained  additional perspectives from regulators, academics, and representatives  of industry and public interest groups through interviews and an expert  roundtable we held with the assistance of the National Academy of  Sciences (NAS). State and Local Governments: Knowledge of Past Recessions Can  Inform Future Federal Fiscal Assistance.
Why GAO Did This Study

The 2007-2009 financial crisis threatened the stability of the U.S. financial system and the health of the U.S. economy. To address regulatory gaps and other problems revealed by the crisis, Congress enacted the Dodd- Frank Act. Federal regulators will need to issue hundreds of rules to implement the act. Industry representatives, academics, and others generally have supported the act's goal of enhancing U.S. financial stability, but implementation of certain of the act's provisions has led to much debate. These experts have expressed a wide range of views on the potential positive and negative effects that the act could have on the U.S. financial system and broader economy.
GAO was asked to examine the (1) losses associated with the recent financial crisis; (2) benefits of the act for the U.S. financial system and the broader economy; and (3) costs of the act's reforms. GAO reviewed empirical and other studies on the impacts of financial crises and the Dodd-Frank reforms, as well as congressional testimonies, comment letters, and other public statements by federal regulators, industry representatives, and others. GAO obtained and analyzed data on agency resources devoted to the act's implementation. GAO also obtained perspectives from regulators, academics, and representatives of industry and public interest groups through interviews and an expert roundtable held with the assistance of the National Academy of Sciences. GAO provided a draft of this report to the financial regulators for review and comment and received technical comments, which were incorporated as appropriate.

What GAO Found

The 2007-2009 financial crisis has been associated with large economic losses and increased fiscal challenges. Studies estimating the losses of financial crises based on lost output (value of goods and services not produced) suggest losses associated with the recent crisis could range from a few trillion dollars to over $10 trillion. Also associated with the crisis were large declines in employment, household wealth, and other economic indicators. Some studies suggest the crisis could have long-lasting effects: for example, high unemployment, if persistent, could lead to skill erosion and lower future earnings for those affected. Finally, since the crisis began, federal, state, and local governments have faced greater fiscal challenges, in part because of reduced tax revenues from lower economic activity and increased spending to mitigate the impact of the recession.
While the Dodd-Frank Wall Street Reform and Consumer Protection Act's (Dodd- Frank Act) reforms could enhance the stability of the U.S. financial system and provide other benefits, the extent to which such benefits materialize will depend on many factors whose effects are difficult to predict. According to some academics, industry representatives, and others, a number of the act's provisions could help reduce the probability or severity of a future crisis and thereby avoid or reduce the associated losses. These include subjecting large, complex financial institutions to enhanced prudential supervision, authorizing regulators to liquidate a financial firm whose failure could pose systemic risk, and regulating certain complex financial instruments. In contrast, some experts maintain these measures will not help reduce the probability or severity of a future crisis, while others note that their effectiveness will depend on how they are implemented by regulators, including through their rulemakings, and other factors, such as how financial firms respond to the new requirements. Quantifying the act's potential benefits is difficult, but several studies have framed potential benefits of certain reforms by estimating output losses that could be avoided if the reforms lowered the probability of a future crisis.
Federal agencies and the financial industry are expending resources to implement and comply with the Dodd-Frank Act. First, federal agencies are devoting resources to fulfill rulemaking and other new regulatory responsibilities created by the act. Many of these agencies do not receive any congressional appropriations, limiting federal budget impacts. Second, the act imposes compliance and other costs on financial institutions and restricts their business activities in ways that may affect the provision of financial products and services. While regulators and others have collected some data on these costs, no comprehensive data exist. Some experts stated that many of the act's reforms serve to impose costs on financial firms to reduce the risks they pose to the financial system. Third, in response to reforms, financial institutions may pass increased costs on to their customers. For example, banks could charge more for their loans or other services, which could reduce economic growth. Although certain costs, such as paperwork costs, can be quantified, other costs, such as the act's impact on the economy, cannot be easily quantified. Studies have estimated the economic impact of certain of the act's reforms, but their results vary widely and depend on key assumptions. Finally, some experts expressed concern about the act's potential unintended consequences and their related costs, adding to the challenges of assessing the benefits and costs of the act.