"The bill would not have prevented the last crisis and will do nothing to prevent the next crisis," says former FDIC Chairman Bill Isaac.
None of the major issues that led to the last crisis are addressed in a significant way, Isaac says. "It politicizes bank regulation by giving Treasury enormous power over the failure resolution process, the Systemic Risk Council and the Financial Stability Oversight Council."
Isaac says the legislation imposes greater regulatory burdens and continues an uneven playing field that will "likely lead to further consolidation in an already too consolidated banking system."
The Senate passed its version of financial regulatory reform bill in a 59-39 vote Thursday evening. Lawmakers have pushed for the extensive overhaul since the financial crisis and recession began in 2007. This Senate bill must now be combined with a similar bill passed by the House back in December.
The Senate's Proposal
Regulatory reform has met stiff opposition by Wall Street firms and the banking industry, as the administration looks to restrict banks and set up a new regulatory oversight agency.
The reform measures are designed in part to end public bailouts of failing institutions and stop the "too big to fail" idea, allowing regulators to dismantle failing firms.
These reforms include:
- Establishing a new council of "systemic risk" regulators to oversee risks in the system;
- The creation of the Consumer Financial Protection Agency, an agency that would oversee and enforce rules that stop abusive practices in the industry starting with lending and credit card practices;
- Giving the Federal Reserve the power to oversee the biggest institutions to prevent risks spilling over into the overall economy;
- Allowing the government to step in and sell off parts of a troubled institution to protect taxpayer money to keep it from failing;
- Empowering agencies to regulate and oversee the giant derivatives market. This will increase transparency of transactions. Regulators would make most contracts be traded through third-parties rather than current practices where banks trade directly with customers. Speculative trading in derivative contracts led to huge losses at many banks during the 2008 financial crisis.
Banks: Focus on Consumer Protection
One of the key provisions of the Senate bill is the creation of the Consumer Financial Protection Bureau, says compliance expert Sai Huda. The CFPB would be an independent agency under the Federal Reserve.
This new agency would serve as a watchdog over compliance with consumer protection laws and regulations by banks and non-banks alike, says Huda, CEO of Compliance Coach, an industry risk assessment and compliance service provider. The CFPB will have independent rule making authority over consumer protection rules.
It would also examine banks with assets over $10 billion for compliance with consumer protection laws. Banks with assets of $10 billion or less would continue to be examined by the current bank regulator for compliance. For large banks, this means more scrutiny over compliance with consumer protection laws, such as unfair or deceptive acts or practices (UDAP). For smaller banks, Huda says this doesn't mean they get a break. "This is because their current bank regulator will step up scrutiny over compliance with consumer protection rules in order to avoid second guessing by the CFPB," he says. "The CFPB can step in if they deem the bank regulator is not doing their job."
Huda says the Senate bill will be reconciled with the House bill. "While there may some tweaks made at this stage, we can be assured that a strong, independent consumer protection watchdog will be created once the legislation becomes law, and more scrutiny will occur over banks and non-banks over compliance with consumer protection laws in financial products and services."