Updated: The media are calling the new Wall Street Reform Law, recently signed by President Obama, the most significant reform of the financial industry since the Great Depression. It looks to tighten the reins on a industry that helped cause the recent recession by requiring the Federal Reserve to create and enforce regulations on the financial industry. The law, whose formal name is the Restoring American Financial Stability Act of 2010 (H.R.4173), is designed to protect consumers, corporations, and the economy as a whole.
Here are the major provisions contained within the law.
The Consumer Financial Protection Bureau will exist inside the Federal Reserve. This organization will advise the Federal Reserve on issues such as changes to credit card statements and contracts, in order to help consumers understand the terms of their agreements. The result should be that credit cards and other financial products become more simplified. In addition, as more states take out payday lenders, I expect this agency to do the same on a federal level.
Enhanced free credit products will now be available. While consumers can currently obtain three annual free credit reports, one from each reporting agency, the government will now require these companies to offer free credit scores as well. While this is a positive move, I expect the availability of these scores will encourage companies to develop a new secret formula for making lending decisions.
The agency will likely limit credit card interchange fees to what is reasonable based on the cost of providing the service. As Smithee mentioned in May, swipe fees make a lot of money for certain companies involved with every use of a credit or debit card, and there is a general thought that these fees are currently uncompetitive.
Borrowers will need to document their income before qualifying for loans. Call them liar loans, no-documentation loans, or alt-a loans, these mortgages offer higher rates to individuals who for whatever reason can’t support their income with proper documentation like tax returns or pay stubs. It will be more difficult for certain consumers to obtain financing with this law in place.
Financial regulators will have a larger role in looking for systemic risk with banks and other financial institutions that are too big too fail. Large financial companies will have the same opportunity as large banks to unwind slowly in a controlled crash. The FDIC’s role will expand beyond pure banking institutions. Large institutions may also be forced to split into several smaller companies to better manage risk to the entire financial system.
The Government Accountability Office will be able to audit the Federal Reserve two years after the Fed takes emergency actions. I assume this two year buffer will allow the effect of the Fed’s actions to echo throughout the markets without immediate interruption.
Executive compensation will be regulated, in all publicly-traded companies, not just in the financial industry. There is not a lot of teeth to this regulation, as it provides for shareholders to have a non-binding advisory role. The problem with this is major shareholders are often executives, board members, and institutional funds that are usually willing to advise the company to spend the money. In addition, the shareholders’ decisions can be ignored by the company.
The bigger part of this part of the law is the encouragement for industries to self-regulate executive pay. I don’t expect much will change in executive compensation as a result of this law; in fact, it might encourage more corporations to become or remain privately-owned companies.
What do you think of the new financial regulation? Does it go too far or not far enough? Will it save or kill the financial industry? Will the new law be enforced?
Published or updated July 21, 2010.