Action On Legislation

Regulatory Reform I
HR 4173
The House was expected to finish voting this week to approve a package of regulatory reform measures from House Financial Services Committee Chairman Barney Frank.

The Wall Street Reform and Consumer Protection Act comprises separate bills designed to improve the regulatory system's framework and to prevent the current financial crisis from recurring. It includes provisions to expand the Federal Deposit Insurance Corp.'s power to resolve systemically significant firms, allow the Federal Reserve Board to be a systemic-risk regulator, and create a consumer financial protection agency. The legislation also includes measures to regulate derivatives, reform the credit rating agencies, enhance investor protections, regulate subprime lending and tie executive compensation to performance as a means of discouraging excessive risk-taking.

Systemic Risk
The House Financial Services Committee approved a bill, 31 to 27, on Dec. 2 that outlined how the government would tackle systemic-risk regulation and resolutions — the last major chunk of the reform package.

The financial stability bill would create an interagency council led by the Treasury secretary to monitor and identify companies that pose a risk to the economy, and it would give the Fed power to raise those companies' capital and leverage requirements.

The council would be able to force the breakup of any systemically important company if it is deemed a threat because of its size or interconnectedness.

The bill would also let the FDIC unwind a systemically important company, but the agency would not be able to help an open and operating large institution. The agency would also be given power to establish a liquidity facility to guarantee the debt of solvent companies.

The financial stability bill includes language added by Rep. Luis Gutierrez, D-Ill., that would alter how deposit insurance premiums are calculated by factoring in assets — a move that would increase the cost of such coverage to the largest institutions.

It would also require systemic-risk premiums to be paid in advance to fund the cost of resolving large institutions. The financial stability bill would set up a $150 billion systemic dissolution fund that would assess financial institutions with $50 billion of assets or more and hedge funds with $10 billion or more. The FDIC could borrow from the Treasury until the dissolution facility is fully funded, and if more were needed, the FDIC could borrow an additional $50 billion, if Congress approved.

The financial stability bill includes a controversial provision added by Rep. Brad Miller, D-N.C., and Dennis Moore, D-Kan., that would let the FDIC force secured creditors to take a 20% haircut in the resolution of a systemically important institution.

The Federal Home Loan banks and other observers have argued that this would prevent the Home Loan banks from offering advances to large banks and would significantly raise banks' cost to offer their own secured debt, but Miller and FDIC Chairman Bair insist the measure is misunderstood and would apply only to creditors supplying short-term debt to systemically significant institutions.

The measure includes another controversial provision added by Rep. Ron Paul, R-Texas, over the objections of Frank and other senior committee Democrats that would expose the Fed to audits by the Government Accountability Office that would include scrutiny of its monetary policymaking.

The bill would consolidate the Office of the Thrift Supervision and the Office of the Comptroller of the Currency but would keep the thrift charter alive under the new merged agency.

It would require originators of any type of credit to maintain exposure to 5% of the loan's risk. And it would end the ability of commercial companies to acquire new industrial loan companies.

The financial stability bill also hamstrings the Fed's emergency powers, known as 13 (3), which it used to give extraordinary aid to American International Group Inc. To trigger a use of the powers, the Fed would need the approval of two-thirds of the members of the systemic-risk council and the consent of the Treasury secretary after certification by the president that an emergency exists. The authority could not be used to aid just an individual company.

Consumer Agency
The House Financial Services Committee approved a bill, 39 to 29, on Oct. 22 that would create a consumer financial protection agency.

The bill would strip the Fed of its power to write consumer protection rules and give that authority to the independent agency led by a director appointed by the president and confirmed by the Senate.

The House Energy and Commerce Committee approved the same bill with a different governance structure, 33 to 19, on Oct. 29; it would create a five-member commission to run the agency.

Frank's bill is expected to prevail with the structure of a single director.

Under language added by Rep. Miller, banks with less than $10 billion of assets and small credit unions would continue to have consumer protections enforced by their primary regulator, but the consumer agency would retain backstop authority and the power to intervene.

The consumer agency would enforce consumer protection laws like the Home Mortgage Disclosure Act and the Truth in Lending Act and be required to regulate both banks and nonbank lenders, including check cashers, payday lenders and mortgage brokers.

Several niche industries were exempted during debate on the bill, including auto dealers; manufactured-home brokers; realty agents; lawyers; accountants; mutual funds, and credit, title and mortgage insurance agents.

One of the bill's most controversial aspects is that it would let states enforce the consumer agency's standards and write and enforce even tougher laws. The bill's initial version would have wiped out federal preemption by applying all state standards to national banks.

But the panel approved an amendment from Rep. Mel Watt, D-N.C., that tries to restore the Office of the Comptroller of the Currency's preemption power to its strength before the agency issued blanket preemption rules in 2004.

The measure would let the OCC preempt state standards on a case-by-case basis when they substantially interfere with the business of national banking. The banking industry is expected to keep pushing to broaden this standard, saying it does not go far enough to guarantee a smooth continuation of their operations.

The House Financial Services Committee approved, 43 to 26, a bill on Oct. 15 that would regulate over-the-counter derivatives.

The legislation would require all standardized swap transactions to be cleared and traded on an exchange or electronic platform, but it allows end-users an exception.

Customized transactions would be required to be reported to a trade repository, and regulators would be directed to set margin levels for counterparties in transactions that are not cleared.

New Legislation

Regulatory Reform II
Senate Banking Committee Chairman Chris Dodd convened the panel for debate on Nov. 19 on an 1,139-page bill to restructure the financial system.

After several members of both political parties embraced the bill's goals but not its details and urged the Connecticut Democrat to find a bipartisan approach, he agreed to reopen the debate and bring in Republicans and interested parties.

Since then, Dodd has parceled off specific aspects of the bill to bipartisan work groups.

He and Sen. Richard Shelby, R-Ala., the panel's top Republican, are working out the bill's treatment of prudential regulation and consumer protection.

Sens. Mark Warner, D-Va., and Bob Corker, R-Tenn., are working on the bill's treatment of systemic risk and resolution authority.

Sens. Jack Reed, D-R.I., and Judd Gregg, R-N.H., are handling the issues of derivatives and credit rating agencies; Reed has offered legislation on both issues.

Sens. Chuck Schumer, D-N.Y., and Mike Crapo, R-Idaho, are working on executive compensation and corporate governance.

Dodd introduced his bill Nov. 10 in a form much more controversial than the House proposal.

One of the most striking differences is the power the bill would entrust to the central bank.

Dodd's draft Restoring American Financial Stability Act would strip all banking supervisory power from the Federal Reserve Board, leaving it with a narrow mission centered on monetary policy, serving as lender of last resort and overseeing the payments system.

Frank's bill would keep the Fed as a banking supervisor and give it additional power over systemic risk.

The Dodd bill would consolidate the Fed's supervision of state member banks and bank holding companies in a new, banking regulatory agency to be called the Financial Institutions Regulatory Administration, or FIRA.

The FDIC's state banking supervision would also be put under FIRA, leaving the FDIC to run the Deposit Insurance Fund and with enhanced authority to resolve systemically significant companies.

The single bank supervisor would also swallow up the OCC and the OTS while eradicating the thrift charter.

It would be led by a five-member board headed by an independent chairman appointed by the president and confirmed by the Senate. The rest of the board would consist of a vice chairman representing state banking expertise, a second independent director and the heads of the Fed and FDIC.

The Dodd bill also would establish a systemic-risk council headed by a presidential appointee to safeguard the financial system as a whole.

The council would have rulemaking authority but no supervision power. It would have nine members, including the heads of the Fed, Treasury, FDIC, FIRA, the consumer protection agency, the Securities and Exchange Commission and the Commodity Futures Trading Commission.

The council would be staffed by economists, accountants, lawyers, former supervisors and other specialists. It would have the power to break up systemically risky companies, force them to increase their capital and limit their growth.

It would recalculate deposit insurance premiums to include assets as a way to insure against risk posed by larger companies.

It would also require institutions to issue long-term hybrid debt securities to set up capital reserves for use during an emergency.

The Dodd bill would establish a consumer financial protection agency that would erode any form of federal preemption, letting states set and enforce tougher consumer protection standards against national and state banks.

Dodd's bill would focus resources on companies that pose the biggest risk to consumers, including mortgage bankers, brokers, finance companies and the largest institutions. For mortgage securitizations, the Dodd bill would require originators to retain 10% of the risk exposure.

The consumer agency would be led by a five-member board, including the chairman of the new consolidated banking regulator.

The legislation would require large, complex companies to draft emergency plans for insolvency. The plans would have to detail an orderly shutdown. Penalties for failing to provide "funeral plans" could include higher capital requirements, further restrictions on growth and activities and forced divestiture of risky activities.

The FDIC's resolution powers would be enhanced to target any systemically risky company. The cost of dismantling such firms would be paid from assessments, after the collapse, on institutions with more than $10 billion of assets.

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