WASHINGTON — Senate Banking Committee Chairman Chris Dodd on Monday released a broad outline of his regulatory reform bill, which heavily reflects input from Republicans who still say they oppose the bill.
The bill would: create an independent consumer watchdog within the Federal Reserve Board; give the central bank power over all financial firms with more than $50 billion in assets; form an interagency council to identify and address systemic risks; create a new resolution system for holding companies; and impose a host of specific requirements including higher capital and leverage standards on large firms that pose a risk to the economy.
Although many of the details of the bill were not surprising, the Treasury Department succeeded in persuading Dodd to include something akin to its proposed "Volcker" rule to ban proprietary trading. The bill would require regulators to prohibit such trading as well as restrict investment and relationships with hedge funds and private equity firms. The provision appears designed to get around opposition raised by lawmakers that Congress was not well-equipped to define proprietary trading. The bill also said that certain nonbank firms subject to supervision by the Fed would also have restrictions on proprietary trading and hedge fund and private equity investment.
Among the most contentious issues are provisions to beef up consumer protections. Under the bill, the consumer division would be led by an independent director appointed by the president and confirmed by the Senate and funded by the central bank. The division would write rules for banks and nonbanks, but only have enforcement powers over banks with more than $10 billion of assets, all mortgage-related businesses and certain large nonbank financial companies. Banks with less than $10 billion in assets would continue to be examined by their primary bank regulators.
Under the bill, the division would have to coordinate with other agencies when examining banks to prevent regulatory burden. They would also consult with regulators before a new proposal is issued to ensure it does not conflict with safety and soundness standards. Regulators would be able to overrule a proposal if it believed it would jeopardize the health of banks or the system in general.
The bill would invest within the Federal Reserve the authority to regulate bank and thrift holding companies with assets over $50 billion and certain large firms that are important to clearing, payments and settlement systems.
Under the bill, the Fed would lose supervision of small state-member banks, which would go to the Federal Deposit Insurance Corp. It would also lose supervision of small holding companies, which would be divided between the FDIC and the Office of the Comptroller of the Currency. The OTS would be eliminated, and while existing thrifts would be grandfathered, no new savings and loans could be chartered.
To complement the Fed's systemic risk oversight role, the bill would create a Financial Stability Oversight Council chaired by the Treasury secretary and consisting of the Fed, the Securities and Exchange Commission, Commodity Futures Trading Commission, the Office of Comptroller of the Currency, the Federal Deposit Insurance Corp., Federal Housing Finance Agency and the new consumer division. The council would be required to identify and respond to emerging risk in the system. It also would make recommendations to the Fed as the systemic risk regulator on rules for capital, leverage, liquidity, risk management and size.
The bill would create an Office of Financial Research within Treasury to support the council's data collection and analysis on systemic risks.
Under the bill, the Fed, with a two-thirds vote by the systemic risk council, could break up a large company if it posed a "grave threat to the financial stability of the United States - but only as a last resort."
The bill would create resolution authority for the FDIC to unwind large, complex financial institutions. Under the bill, the Treasury, FDIC and Fed must agree to put a company into the liquidation process after a panel of three bankruptcy judges agree the company is insolvent.
To fund the resolution, the bill calls for the creation of a fund of $50 billion, which would come from assessments on the largest financial firms.
The bill would reform the central banks' 13(3) authority, or emergency lending authority, by limiting it to "system-wide support" for healthy institutions or systemically important companies during a major destabilizing event but not to prop up an individual institution. It also increases the Fed's disclosure related to 13(3) by requiring the Fed to report within 7 days of extending loans the identity of borrowers, collateral, amounts borrowed "unless doing so would defeat the purpose of the support." The Fed may delay the disclosure by a year if it would comprise the program or financial stability.