Reform Package Wins Praise
Source: The Deal – June 28, 2010
By: Bill McConnell
The financial reform bill approved by House and Senate conferees early Friday morning, June 25, will be known as the Dodd-Frank Act, after negotiators from the two chambers unanimously voted to name the legislation after its two chief authors moments before approving the overall package. On a more substantive level, just how the legislation will be remembered won’t be known for quite some time. For certain, the regulations and changes being ushered in will raise the financial industry’s costs of doing business.
Whether those costs will have been worth it can’t be judged until the economy has lived through another financial crisis.
The conference report, which melded the separate financial reform bills passed by the House and Senate into a single bill, must still be approved by the two chambers, although passage this week is all but assured. After that, financial regulators will spend months writing regulations for capital requirements, proprietary trading and other requirements of the bill.
The major tenets of the legislation will give federal regulators authority to dissolve failed nonbank financial firms, establish a council of regulators to watch for risks growing in the financial system, create a federal agency to write and enforce consumer protection rules for financial products, regulate the $600 trillion market for derivatives, require hedge fund advisers and other managers of private pools of capital to register with the Securities and Exchange Commission, give shareholders more say on executive pay and make other changes to corporate governance.
For his part, President Obama wasn’t waiting for a long-term verdict on the legislation. As he prepared to head to Toronto for this weekend’s G-20 summit, he declared the bill an overwhelming success. “We are poised to pass the toughest financial reform since the ones we created in the aftermath of the Great Depression,” he said in a statement delivered from the White House lawn Friday morning. “The reforms making their way through Congress will hold Wall Street accountable so we can help prevent another financial crisis like the one that we’re still recovering from.”
This bill remains opposed by much of the financial industry and Republicans in Congress. The American Bankers Association said the provisions it supports, such as creating the systemic risk council to watch for growing threats to the financial system and giving regulators authority to take down failed financial conglomerates, are overshadowed by the new burdens on commercial banks. “The consequences involved are very real and will have a very negative impact on traditional banks, on consumers and on the broader economy,” ABA president Edward Yingling said in a statement. “This bill will, in the end, add well over a thousand pages of new regulations for even the smallest bank.”
Big Wall Street institutions, blamed for much of the securitization and trading excesses that led to the crisis, were more stoic about bearing the weight of the new regulations. Steve Bartlett, president of the Financial Services Roundtable, which represents the 100 largest U.S. financial firms, said the industry “is committed to making this bill work.” Despite some concerns, “we are very pleased to have this certainty and closure about how we can continue to move our economy forward.”
Ron Wince, CEO of Guidon Performance Solutions LLC, which advises financial institutions on regulatory compliance, said executives at smaller banks have some justification for displeasure because the limits on their activities, higher capital requirements and assessments on the industry are likely to be more of a relative burden. “Smaller banks feel they are going to be unfairly burdened by those requirements. They feel like it’s guilt by association to some extent.”
Larger institutions will react by restructuring their operations to comply with new rules and adopting a more conservative approach to business, he said.
Brookings Institution fellow Douglas Elliott agrees with many critics that the bill does provide all that is needed to stabilize the financial system and may do harm in some areas. But taken as a whole, it will improve U.S.
financial regulation. “The bill, combined with regulatory changes that are in train, will move us perhaps two-thirds of the way from where we are now on financial regulation to where we should be. In the real world, this is grounds for real congratulations.”
Elliott said the legislation’s greatest achievement is perhaps the range of issues that it tackled, including consumer protection, derivatives, securitizations, rating agency behavior, trading activities, bank compensation, rules for marketing securities, the resolution process for troubled financial institutions and the creation of a new council of regulators to oversee risk brewing in the system. It also provides a necessary “congressional seal of approval” for regulators’ ongoing effort to toughen capital and liquidity requirements.
Like the Republicans, he agrees that the failure to address the systemic threat posed by government-sponsored mortgage securitizers Fannie Mae and Freddie Mac is a big omission. However, trying to fix them now might have killed the legislation: “It was better to secure the many necessary reforms in other parts of the financial system than to try for more than could be done in this session of Congress.”
Bradley Sabel, co-leader of Shearman & Sterling LLP’s economic stabilization advisory group and a former official at the Federal Reserve Bank of New York, agreed that on balance the bill is a positive for the financial system.
“There are some good things in this. The systemic risk council is a good thing,” he said.
Sabel also was heartened by the lawmakers’ decision to place all critical elements of the payments system under Federal Reserve supervision. “Fed authority over the payment system is a really good thing. It’s not at all sexy, but it’s really important for the smooth execution of payments,” he said.
Some provisions do worry him, however. One puts new restrictions on the Fed’s emergency lending authority for nonbank financial institutions. Under the new regime, the Fed would not be able to act on its own as it did in the recent crisis, but it would have to get approval of the Treasury secretary and Congress and could not provide funds just to prop up an individual institution. The Fed would have had a much more difficult time stemming financial panic if these restrictions were in place in 2008, he said. “I don’t think the Fed could have funded Bear Stearns or AIG, which was necessary to get us through the crisis.”
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