WASHINGTON - Leaders of the House Banking Committee introduced compromise legislation to tighten the regulation of bank's derivatives activities yesterday in hopes that the measure can be enacted by Congress later this year.
The Derivatives Safety and Soundness Supervision Act of 1994 calls for the bank regulators, the Office of Federal Housing Enterprise Oversight, the Federal Housing Finance Board, and the National Credit Union Administration to jointly establish comprehensive and consistent standards for the derivatives activities of banks, government-sponsored agencies, and federal credit unions.
The bill was sponsored by Rep. Henry Gonzalez, D-Tex., the chairman of the banking committee; Rep. Jim Leach, R-Iowa, the ranking minority member of the panel; and several other panel members. It was introduced just one day after Rep. John Dingell, D-Mich., appeared to nix any possibility that the House Energy and Commerce Committee will consider legislation this year to regulate the derivatives activities of securities firms and their affiliates.
The bill contains parts of bills that Gonzalez and Leach introduced separately earlier this year.
Gonzalez said the bill is not "punitive" but is instead "designed to strengthen the banking system by ensuring the safe and sound conduct of financial institutions' derivatives activities."
The bill is an attempt to avoid a repeat of a disaster such as the savings and loan crisis, when regulators "fell asleep at the switch," Gonzalez said in a prepared statement.
"In order to protect taxpayers from a similar crisis, the Congress must ensure that the regulators fully understand the individual and systemic risks posed by derivatives" and must "ensure that they are aggressively supervising and regulating" derivatives activities, Gonzalez said.
Leach said the bill "is an important and timely step in preventing what could be a significant disruption in the world financial system."
But he said that in order to ensure there is a "level playing field" among derivatives market participants, the House Energy and Commerce Committee must "address the regulatory gaps" for securities firms that were outlined in the General Accounting Office's recent report on derivatives.
Gonzalez urged derivatives market observers to "question the Fed's assertions that the existing level of [derivatives] regulation... is sufficient."
Federal Reserve Board Chairman Alan Greenspan told members of a House Energy and Commerce subcommittee on Wednesday that it would be a mistake to legislate a new regulatory regime for the derivatives markets, which are evolving rapidly.
The Gonzalez and Leach bill is limited to the committee's jurisdiction over banks and other financial institutions, a committee aide said.
The two lawmakers expect it to be marked up by the committee's subcommittee on financial institutions supervision, regulation and deposit insurance in June and to be approved by the full committee in July, the aide said. The subcommittee is chaired by Rep. Steve Neal, D-N.C., one of the co-sponsors of the bill.
The bill would require bank and other regulators to establish uniform capital, accounting, disclosure, suitability, and examinations standards for the derivatives activities of banks, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corp., and federal credit unions.
It would prohibit a financial institution from engaging in derivatives activities unless they are conducted under a written management plan containing "prudential standards" that are approved by a board of directors.
The bill would also require that:
* A "sufficient number" of directors of a derivatives dealer or end user be familiar with the risks associated with any derivatives activities undertaken.
* Federal regulators, within one year, set up a system under which they can obtain the kind of derivatives information that would be needed in an emergency situation.
* The administration include top officials from the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency on the interagency Working Group on Financial Markets or any other interagency group that deals with derivatives.
* The Federal Financial Institutions Examination Council sponsor training programs on derivatives for federal and state bank examiners as well as employees of the Office of Federal Housing Enterprise Oversight, the Federal Housing Finance Board, and the National Credit Union Administration.
* The General Accounting Office study and speculative use of derivatives and the feasibility of imposing margin and collateral requirements on speculative transactions.
* The Treasury secretary seek a meeting with other major industrialized nations to study the adequacy of international regulation and supervision of derivatives.
* The Federal Reserve and Office of the Comptroller of the Currency encourage the central banks and regulatory authorities of other nations to work toward adopting comparable standards on derivatives.
The bill also would amend the Federal Deposit Insurance Act to ensure that certain derivative instruments are covered under the banking law's new netting and settlement provisions.
Under the bill, a bank or other financial institution would be deemed to be operating in an "unsafe and unsound manner" if it did not conduct its derivatives activities according to a written plan based on prudent standards or ensure its directors are aware of the risks of those activities.