WASHINGTON -- Nearly two years after the American financialSo what does all this mean to you and me? Let's see what Business Week has to say.
system teetered on the verge of collapse, congressional
negotiators reached agreement early Friday morning to
reconcile competing versions of the biggest overhaul of
financial regulations since the Great Depression.
A 20-hour marathon by members of a House-Senate conference
committee culminated at 5:39 a.m. Friday with the approval of
proposals to restrict trading by banks for their own benefit
and requiring banks and their parent companies to segregate
much of their derivatives activities.
On a party-line vote, the House conferees voted 20-11 to
approve the bill; the Senate conferees voted 7-5 to approve.
The agreement cleared the way for both houses of Congress to
vote on the full financial regulatory bill next week.
- New York Times
The Obama administration’s proposal to ban banks from proprietary trading, nicknamed the Volcker rule after former Federal Reserve Chairman Paul Volcker, was softened by Senate negotiators.
Banks will be allowed to invest in private-equity and hedge funds, though they will be limited to providing no more than 3 percent of the fund’s capital. Banks also can’t invest more than 3 percent of their Tier 1 capital.
After spending months crafting legislation, lawmakers pushed through a last-minute deal on what they termed the most challenging part of their task -- establishing for the first time a regulatory structure for the $615 trillion over-the- counter derivatives market.
The most contentious part of the derivatives rules is a provision that will force banks to push some of their swaps- trading into subsidiaries, on the theory it would reduce taxpayers’ risk if the trades are walled off from depositary institutions that enjoy federal benefits such as access to the Federal Reserve’s discount lending window.
OK, this seems to be the section that deals with us "everyday" consumers most directly. So let's see what Business Week has to say on this section of the proposed new law.
A consumer financial-protection bureau will be created at the Federal Reserve to police banks and financial-services businesses for credit-card and mortgage-lending abuses. The plan was approved over the objections of Republicans and the financial industry.
Obama originally proposed a stand-alone consumer agency, saying it would play a central role in reorganizing regulation to prevent future financial crises.
“It’s an agency with considerable authority to protect consumers from abusive financial practices, which is a landmark achievement,” Travis Plunkett, legislative director at the Consumer Federation of America, said in an interview.
While the bureau will be housed at the Fed, it will have independent authority. Led by a director appointed by the president and confirmed by the Senate, the bureau will write consumer-protection rules for banks and other firms that offer financial services or products. It will enforce those rules for banks and credit unions with more than $10 billion in assets. Bank regulators will continue examining consumer practices at smaller financial institutions.
The bureau could require credit-card lenders, including JPMorgan Chase & Co. and Citigroup Inc., to reduce interest rates and fees. Mortgage lenders, including Bank of America Corp., may be subject to tougher rules including more upfront disclosures to borrowers about loan terms.
Automobile dealers won an exemption from oversight by the bureau after lobbying from the industry. Dealers said the rules would place unnecessary restrictions on their financing business. The Obama administration had opposed the exemption.
Oh, great, in-other-words, bigger government looking over our shoulders and more federal taxes to pay for it. Ok, the bill doesn't stop there, so back to Business Week.
The Federal Reserve will get authority to limit interchange, or “swipe” fees, that merchants pay for each debit-card transaction. The measure, pushed by Senator Richard Durbin, lets retailers refuse credit cards for purchases under $10 and offer discounts based on the form of payment.Ok, so this provision sounds a lot like something they had in Guernsey (Channel Islands, United Kingdom) a few years ago. I was vacationing on the island of Sark (the worlds last Feudal State, and was told when I was purchasing a small trinket, that I needed to spend at least "10 British pounds" if I wanted to swipe the credit card, I carried at the time. Back to Business Week.
The measure also directs the Fed to issue rules that let merchants route debit-card transactions on more than one network. That “provides additional competition to a previously non-competitive part of the market,” Durbin, an Illinois Democrat, said in a statement June 21.
Visa Inc. and MasterCard Inc., the world’s biggest payments networks, set interchange rates and pass that money to card- issuers including Bank of America and JPMorgan. Interchange is the largest component of the fees U.S. merchants pay to accept Visa and MasterCard debit cards. The fees totaled $19.7 billion and averaged 1.63 percent of each sale last year, according to the Nilson Report, an industry newsletter.
You thought we were done with new government agencies? Think again, there is yet another big government agency being created by this proposed bill.
The bill will establish the Financial Stability Oversight Council, a super-regulator that will monitor Wall Street’s largest firms and other market participants to spot and respond to emerging systemic risks. The Treasury Department will lead the panel, which includes regulators from other agencies.
“The idea of the council is to look at the interconnection of highly leveraged financial firms,” said Jim Hamilton, a senior law analyst at Riverwoods, Illinois-based CCH Inc., which provides information to businesses about regulatory changes. “No one was able to do that before the financial crisis.”
With a two-thirds vote, the council can impose higher capital requirements on lenders or place broker-dealers and hedge funds under the authority of the Fed. The council also will have authority to force companies to divest holdings if their structure poses a “grave threat” to U.S. financial stability.
The bill may force some banks to shore up capital. An amendment introduced by Senator Susan Collins, the Maine Republican who joined Democrats in voting for the broader bill, will bar bank holding companies from keeping less capital than their bank subsidiaries. That will have an impact on the use of trust preferred securities, known as TruPS. Lawmakers bowed to pressure from banks, agreeing to a transition period for large firms and grandfathering of the securities for smaller lenders.
The Federal Reserve will have a broadened supervisory scope and be subject to the most transparency in its 96-year history after negotiators rejected threats to its political autonomy and bank-oversight powers.Wait a minute, broader supervisory scope, so again bigger government, which translates into more people on the government payroll. Which means even more taxes for you and I to pay for it all.
Chairman Ben S. Bernanke will have a seat on a newly created Financial Stability Oversight Council. That board will deputize the Fed to set tougher standards for disclosure, capital and liquidity. The rules will apply to banks as well as non-bank financial companies, such as insurers, that pose risks to the financial system.
OK, back to Business Week.
Ratings companies, including Moody’s Corp. and McGraw-Hill Cos.’ Standard & Poor’s unit, may avoid a plan to have regulators help pick which firms grade asset-backed securities. Congress also softened a proposed liability provision, making it harder for investors to sue credit raters than under language approved by the House in December.
The overhaul legislation requires the SEC to conduct a two- year study on whether to create a board to decide who rates asset-backed securities. That curbed a Senate proposal to establish the board with SEC oversight. After the study, the board would be established only if regulators can’t come up with a better alternative.
Large hedge and private equity funds will be forced to register with the SEC, subjecting them to mandatory federal oversight for the first time. Venture capital funds were exempted from the registration rule.
Hedge funds, in particular, pushed for the registration requirement, which is less burdensome than the regulations being imposed on banks. In lobbying Congress, representatives of the private pools of capital argued that they shouldn’t be heavily regulated because they didn’t cause the financial crisis. Nor were they bailed out by taxpayers.
Registration subjects funds to periodic inspections by SEC examiners. Any firm with $150 million or more in assets, such as ESL Investments Inc. and Soros Fund Management, will be covered by the law. Funds also must hire a chief compliance officer and set up policies to avoid conflicts of interest.
The bill gives the FDIC, which already has authority to liquidate failed commercial banks, power to unwind large failing financial firms whose collapse would roil the economy.
Regulators will have clout they lacked during the financial crisis when, instead of seizing flailing companies such as American International Group Inc., the government kept them afloat with a $700 billion taxpayer-funded bailout. Had such authority existed in September 2008, it might have been applied to Lehman Brothers Holdings Inc., whose bankruptcy that month froze credit markets and helped spur Congress to approve the Troubled Asset Relief Program.
The legislation will force lenders, with the exception of some mortgage providers, to hold at least a 5 percent stake in debt they package or sell. The provision is designed to rein in the trade of easy credit blamed for fueling the financial crisis.
The rule will affect credit-card debt, auto loans, mortgages and other securitized debt. Issuers of asset-backed debt and the originators who supply them with pools of loans, including credit-card companies such as Riverwoods, Illinois- based Discover Financial Services, will be forced to retain some of the credit risk. The goal is to align the issuers’ interests with those of the investors who buy their financial products.
The provision will curtail lending and raise consumer costs, said Tom Deutsch, executive director of the American Securitization Forum, a New York trade group that represents issuers, investors and other participants in the market.
Lawmakers scrapped a proposal that would have made securities firms more accountable to individual investors. Instead, the SEC is required to study whether changes are necessary.
The debate focused on whether stock brokers who offer clients investment advice should have a fiduciary duty that requires disclosure of all conflicts and restricts marketing to products that are in customers’ best interests. Currently, brokers must only ensure that a stock or bond is suitable before selling it to a client.
Guess what, this bill creates yet another federal agency. This one watch over the insurance companies. Below is what Business week had to say about this.
The bill creates a new Federal Insurance Office within the Treasury to monitor insurers, and requires a study that will recommend ways to further overhaul regulation of the industry. Industry groups say a new layer of oversight may complicate compliance and increase costs.While I think some tighter regulation may be needed, I have to wonder, if this is overkill. Especially, when there is at least three (3) brand new agencies being created in this proposed bill. We will have to keep on eye out for the final version after the final vote this week.
The measures were prompted by the near-collapse of New York-based AIG in 2008. The insurer, then the world’s largest, got a $182.3 billion taxpayer bailout after failing to set aside enough money to cover obligations on credit-default swaps linked to subprime mortgages.
Insurers, which are mainly regulated by states, will now have to deal with a national watchdog. State insurance commissioners are concerned federal oversight will interfere with rules already in place. Insurers are concerned that they will have to devote more resources to answer to multiple officials.
“Half of our companies are farm- and county-mutual companies,” said Dylan Jones, federal affairs director of the National Association of Mutual Insurance Companies, which represents policyholder-owned carriers. “They certainly don’t have the resources to respond to federal regulatory calls.”
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