In December of last year, the House of Representatives passed a bill designed to reform the financial industry, introducing more consumer protection and more regulation of Wall Street firms and other financial businesses. The Senate also tackled the controversial topic of financial reform, passing its own version of the bill yesterday.
Though not an attractive acronym, the Restoring American Financial Stability Act of 2010 (S. 3217) has a number of goals. Several hundred amendments have been introduced and passed since the bill was introduced to the Senate on April 15, so some of these details may have changed. The full text of the bill in its current form is not yet available, but I will update this article throughout the remaining process as more details become available, culminating with the President signing a compromise bill into law.
Here are some of the highlights of the bill recently passed by the Senate.
Establish new regulatory bodies and rearrange responsibilities
A Financial Stability Oversight Council will identify systemic risks to financial stability of the United States, promote market discipline, and respond to financial threats. An Office of Financial Research will support the oversight council from within the Department of the Treasury. The Federal Reserve Board will now have the power to oversee non-bank financial companies and bank holding companies, a significant increase of scope.
The FDIC will be able to be appointed as a receiver for any financial company in default or in risk of default, not just banks. This will provide a way for large banks to be orderly dismantled before they damage the economy in significant terms. There would theoretically be no more “too big to fail” banks. The FDIC will also take on some functions of the Office of Thrift Supervision (OTS), which will be abolished.
Regulation of other financial products
Hedge funds will be required to register, insurance companies will receive a new oversight body (the Office of National Insurance), and there will be new regulations for reinsurance contracts. Credit card banks and industrial loan corporations will no longer qualify for FDIC insurance. The SEC and CFTC will receive new power to regulate derivative financial products including security-based swaps.
Rating agencies will face new regulation to ensure accountability and transparency and a new organization will be created to protect investors.
Financial companies sold mortgage-backed securities as a way to pass the risk of default onto another party, but they weren’t sold as risky investments. The bill seeks to ensure companies require the securitizer to retain risk when asset-backed securities are created, packaged, and sold.
The Federal Reserve will contain a Bureau of Consumer Financial Protection, and three other organizations will be created: the Office of Fair Lending and Equal Opportunity, the Office of Financial Literacy, and the Consumer Advisory Board.
The government will issue grants and other assistance to ensure low income families will have access to establish accounts in FDIC insured banking institutions, and at those banks, will have access to accounts with “reasonable terms.”
While the summary above doesn’t hit on every aspect contained within the bill in its current form, the summary does target the potentially biggest changes to the financial industry and the more significant consumer protections. A few lawmakers who voted against the bill believe the changes to the industry do not go far enough to ensure a stable financial system, while others believe the industry needs no additional regulation.
Now that similar bills have passed both the Senate and the House of Representatives, a small team of Democrats and Republicans will meet to work out differences between the two versions. Before long, a final bill will be presented to the President and will undoubtedly be signed into law.
What’s your take on the proposed law to further regulate Wall Street? Is it necessary to ensure consumer protection or a roadblock on the way to profit?
Photo: David Paul Ohmer