Action On Legislation

Regulatory Reform I
HR 4173
The House approved a regulatory reform bill 223 to 202 on Dec. 11; no Republicans voted for it and 27 Democrats voted against it.

The Wall Street Reform and Consumer Protection Act, sponsored by House Financial Services Committee Chairman Barney Frank, D-Mass., combined several pieces of legislation designed to improve the regulatory system's framework and avoid a repeat of the financial crisis.

Here are the bill's components:

Consumer Protection
The Federal Reserve Board would be stripped of power to write consumer protection rules. Responsibility for enforcing a host of consumer protection statutes like the Home Mortgage Disclosure Act and the Truth in Lending Act would be given to a new federal consumer protection agency.

As proposed, the agency would have set and enforced standards for all financial services providers including banks and nonbank lenders, and let state attorneys general go further to enforce their own rules even against national banks. But significant opposition led to several changes that watered down the measure.

Exempted from the agency's jurisdiction were community banks and small credit unions as well as auto dealers, manufactured-home brokers, realty agents, lawyers, accountants, mutual funds and credit, title and mortgage insurance agents. The agency could charge higher assessments to institutions with poor track records on consumer protection or that pose excessive risk. Under a deal cut by Frank and House Energy and Commerce Committee Chairman Henry A. Waxman, D-Calif., the agency would initially be led by an independent director as Frank preferred and then transitioned into a presidential-appointed commission favored by Waxman.

The final bill also would reduce the threshold required for the Office of the Comptroller of the Currency to preempt any state law that "prevents, significantly interferes with or materially interferes" with the business of banking. It would reaffirm the deference given to the OCC's rulings by the courts. Banks also could go directly to the courts to preempt a state standard without the OCC's acting at all.

Within 180 days of enactment, bank branches also would be required to prominently display overdraft-fee rates and terms.

Systemic Risk
To combat the problem of "too big to fail" institutions, the bill includes provisions that outline how the government would tackle systemic-risk regulation and resolutions. The financial stability bill would create an interagency council of regulators 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 by acting as the agent of the council.

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

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

During debate on the floor, the House approved several changes to the legislation, including provisions to enhance the Fed's power to break up large, complex firms and cap the FDIC debt-guarantee program for solvent firms at $500 billion, and clarify that any special assessment needed to cover losses would come only from institutions that participated in the program. It also would permit the FDIC to require warrants for assistance provided. The manager's amendment would empower the FDIC to push a defaulting borrower into receivership or bankruptcy.

Building on legislation added at the committee level by Rep. Paul Kanjorski, D-Pa., that would let the systemic-risk council break up healthy firms that could pose a risk to the system, the bill was changed so that it would explicitly give the Fed the same power under the Bank Holding Company Act to prevent mergers, acquisitions or consolidation of nonbank financial holding companies. It also added language to clarify that prudential regulators have broad authority to require tougher standards on firms they oversee that pose a systemic risk.

Another change was one sought by Rep. Brad Miller, D-N.C., that would cut in half, to 10%, a haircut the FDIC could impose on secured creditors when resolving systemically significant firms. The provision was narrowed to focus on short-term lending of 30 days or less and to carve out federally backed credit including advances from the Federal Home Loan banks, Treasury securities and debt guaranteed by the government-sponsored enterprises.

Another change would dilute the current limit that bars any bank from growing through acquisitions once it holds more than 10% of the nation's deposits; the bill would add thrift deposits to that calculation.

The financial stability section 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 also would require that systemic-risk premiums be paid in advance to fund the cost of resolving large institutions. The bill would set up a $150 billion systemic dissolution fund that would assess financial institutions with assets of $50 billion 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 section 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 also would consolidate the Office of Thrift Supervision and the Office of the Comptroller of the Currency, but would retain the thrift charter.

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 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 these 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.

Derivatives
The bill also would regulate over-the-counter derivatives.

During debate on the floor, the House adopted, 228 to 202, a controversial amendment from Rep. Stephen Lynch, D-Mass. that was opposed by big banks that serve as major swaps dealers. It would prohibit them from owning more than a 20% stake in a derivatives clearing house, essentially requiring all major financial institutions to divest such swap-exchange facilities. The derivatives section 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 set margin levels for counterparties in transactions that are not cleared.

New Legislation

Regulatory Reform II
Senate Banking Committee Chairman Chris Dodd, D-Conn., announced Jan. 6 that he would retire from the Senate when his term expires at yearend.

Most observers viewed the announcement as an indication that Dodd will focus on completing a regulatory overhaul bill this year. He and the panel's top Republican, Sen. Richard Shelby of Alabama are negotiating a compromise bill. It is unclear when a new draft will surface.

Dodd introduced a regulatory reform discussion draft on Nov. 10 and has since assembled teams of lawmakers to hash out key issues. He and Shelby are working on prudential regulation and consumer protection. Sens. Mark Warner, D-Va., and Bob Corker, R-Tenn., are working on systemic risk and resolution authority. Sens. Jack Reed, D-R.I., and Judd Gregg, R-N.H., are handling derivatives and credit rating agencies. Sens. Chuck Schumer, D-N.Y., and Mike Crapo, R-Idaho, are working on executive compensation and corporate governance.

One of the most striking differences is the power the bill would entrust to the Fed. Dodd's draft Restoring American Financial Stability Act would have stripped banking supervisory power from the Fed, leaving it with a 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 more power over systemic risk.

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

The discussion draft also proposed putting the FDIC's state bank supervision under the FIRA, leaving the FDIC to run the Deposit Insurance Fund and with enhanced authority to resolve systemically significant companies. But amid pressure from committee members, the FDIC is expected to retain its state banking oversight and may be given state bank holding company oversight, too.

The FIRA would swallow up the OCC and the OTS while eliminating 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, require 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 also would require institutions to issue long-term hybrid debt securities to set up capital reserves for use during an emergency.

Another controversial section of the bill likely to be significantly altered is a proposal to 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.

For mortgage securitizations, Dodd's 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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