Dodd Unveils New Vision of Financial Regulatory Reform

Experts: 'Is It Really the Right Time?' U.S. Senate Banking Committee Chairman Christopher Dodd on Monday unveiled his revised vision for financial regulation reform legislation.

The Connecticut Senator's bill looks to boost consumer protections; end the assumption that some financial firms are "too big to fail;" deal with systemic financial risk in the economy; and regulate over-the-counter derivatives.

However, some banking observers say this bill may not have the bipartisan support it needs to pass in an election year. Never mind that it is being pushed into the Senate at the same time the healthcare reform bill is being tested.

"Is it really the right time to re-engineer the regulatory structure?" asks Walt Mix, former head of the California Department of Financial Institutions.

The Bill's Highlights

The 1,336-page bill is summarized into the following areas:

Consumer Protections with Authority and Independence: Creates a new independent watchdog, housed at the Federal Reserve, with the authority to ensure American consumers get the clear, accurate information they need to shop for mortgages, credit cards, and other financial products, and protect them from hidden fees, abusive terms, and deceptive practices.

Ends Too Big to Fail: Ends the possibility that taxpayers will be asked to write a check to bail out financial firms that threaten the economy by: creating a safe way to liquidate failed financial firms; imposing tough new capital and leverage requirements that make it undesirable to get too big; updating the Fed's authority to allow system-wide support but no longer prop up individual firms; and establishing rigorous standards and supervision to protect the economy and American consumers, investors and businesses.

Advanced Warning System: Creates a council to identify and address systemic risks posed by large, complex companies, products, and activities before they threaten the stability of the economy.

Transparency and Accountability for Exotic Instruments: Eliminates loopholes that allow risky and abusive practices to go on unnoticed and unregulated - including loopholes for over-the-counter derivatives, asset-backed securities, hedge funds, mortgage brokers and payday lenders.

Federal Bank Supervision: Streamlines bank supervision to create clarity and accountability. Protects the dual banking system that supports community banks.

Executive Compensation and Corporate Governance: Provides shareholders with a say on pay and corporate affairs with a non-binding vote on executive compensation.

Protects Investors: Provides tough new rules for transparency and accountability for credit rating agencies to protect investors and businesses.

Enforces Regulations on the Books: Strengthens oversight and empowers regulators to aggressively pursue financial fraud, conflicts of interest and manipulation of the system that benefit special interests at the expense of American families and businesses.

Bill 'May Not Get Passed'

The move by Dodd to reshape the Federal Reserve into an agency that looks similar to the Financial Services Authority (FSA) in Britain, with all other agencies reporting under one office, may be seen as a move to centralize the financial services under one big umbrella. According to Mix, this may be one of several reasons that Dodd's bill won't get passed. Among the other reasons: the focus on healthcare reform in Congress.

The American Bankers Association (ABA) is opposed to the new bill and suggests several areas need to be changed, including:

  • Approach to consumer protection, which continues to separate prudential and consumer regulation;
  • Elimination of the thrift charter;
  • Elimination of the Federal Reserve's authority over state member banks;
  • Issues within the resolution mechanism;
  • Weakening of federal preemption;
  • Failure to address accounting issues in any fashion.

"We oppose this bill because it will subject traditional banks, which did not cause this crisis, to heavy new regulation, while non-banks will have even further competitive advantage," says ABA's President and CEO Ed Yingling in a statement. "The future of traditional banks will be unnecessarily put at risk and their ability to provide the credit our economy needs will be undermined."

Mix says that the real question is how this bill will impact the commercial real estate problem and overall lending. "I wonder if the timing is right for a bifurcated banking system. Larger banks are doing okay, but the regional and community banks are struggling to stay afloat and work through their loans," Mix says.

The frustration for institutions, Mix says, "Is at the same they're trying to increase lending, the legislators are pressing for more regulation." The dual banking approach has been prized throughout the history of American banking, so moving away from choice and personalization toward centralization is against what most expect from the system, Mix explains. "With the increased cost of regulation cost passed to medium and small banks, this will definitely impact their ability to make loans."

About the Author

Linda McGlasson

Linda McGlasson

Managing Editor

Linda McGlasson is a seasoned writer and editor with 20 years of experience in writing for corporations, business publications and newspapers. She has worked in the Financial Services industry for more than 12 years. Most recently Linda headed information security awareness and training and the Computer Incident Response Team for Securities Industry Automation Corporation (SIAC), a subsidiary of the NYSE Group (NYX). As part of her role she developed infosec policy, developed new awareness testing and led the company's incident response team. In the last two years she's been involved with the Financial Services Information Sharing Analysis Center (FS-ISAC), editing its quarterly member newsletter and identifying speakers for member meetings.

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