Wednesday, November 10, 2010
A wave of new and returning members of Congress will take their seats next year after winning elections by campaigning against Wall Street, government bailouts, and TARP. These members must determine how to best turn their rhetoric into action. They will be joined by many of the architects of last year's landmark Dodd-Frank financial reform legislation, the most comprehensive financial regulation reform law in modern times. Together, they will focus on monitoring and influencing the implementation of the new law and several other issues.
A majority of the financial services action will reside at the other end of Pennsylvania Avenue, as multiple regulatory agencies write rules to implement Dodd-Frank. All told, the legislation requires more than 240 rule makings and 60 studies to be completed, many within a relatively short period. Fresh from their electoral victory, House Republicans have voiced their intention to influence Dodd-Frank rule making.
Indeed, the likely House Financial Services Chairman, Spencer Bachus (R-Ala.), has already put regulators on notice not to "rigidly" implement part of the so-called Volcker rule aimed at curbing banks' risk-taking by saying it will impose "substantial costs" on the economy. The Volcker rule, proposed by the Financial Stability Oversight Council (FSOC), restricts the ability of banks to trade for their own accounts, unrelated to customer needs; this is a practice known as proprietary trading. The rule also limits the involvement of banks with hedge funds and private equity firms, and sets a new cap on the domestic expansion capacity of the largest banks.
Included among other rules already proposed by federal agencies are:
- The FSOC is also seeking public comment on draft regulations that would spell out when nonbank financial companies require heightened supervision. The rule would affect any bank holding company with more than $50 billion in assets automatically classifying those institutions as "systemically significant."
- The SEC has unveiled proposed rules intended to prevent big banks from wielding too much voting power in clearing and trading venues for security-based swap products such as credit-default swaps.
- The Federal Deposit Insurance Corporation (FDIC) has proposed a rule that would require creditors of large financial firms to suffer losses in the event of a firm's collapse while leaving some room for the government to make payments to certain creditors.
- The Commodity Futures Trading Commission (CFTC) is proposing rules focused on firms that deal in swaps as well as on companies engaged in heavy swap trading, which could pose systemic risk to the marketplace. The anticipated regulations include rules forcing dealers and major traders to use clearinghouses, which stand between parties to guarantee trades, and execute some of their contracts on regulated trading platforms.
Senate Banking Committee Ranking Republican Sen. Richard Shelby (R-Ala.) has said making changes to Dodd-Frank is a top priority and incoming-Speaker of the House John Boehner has called for the law's repeal. Even with Boehner's repeal call, expect the financial regulation law to undergo fine-tuning rather than finding the scrap heap.
Republicans may use critical oversight hearings in the House to focus on several of these rules along with the new Consumer Financial Protection Bureau (CFPB); Congressional leaders are likely to seek to influence the contours of the new Bureau and its operations. Also, the GOP House majority may seek to use the appropriations process to limit funds intended to enable the Securities Exchange Commission (SEC) and the CFTC to hire staff to enforce Dodd-Frank reforms.
The fate of Fannie Mae and Freddie Mac is also likely to be debated as the Obama administration continues to consider reform proposals to the mortgage giants, and is promising to deliver a plan in January. Election year rhetoric aside, bipartisan agreement on fundamental reform principles, including an end to implicit government guarantees for mortgage-backed securities and separating federal support for low-income housing from mortgage finance, might be within reach. As the Congress reconvenes, watch if the rhetoric on this debate softens and whether or not either side decides to extend an olive branch to the other and to find middle ground that preserves the mortgage-guarantee giants while insulating taxpayers from another bailout.
While insurance issues are not likely to receive too much attention in the new Congress, incoming Senate Banking Committee Chairman Tim Johnson (D-S.D.) has long focused scrutiny on optional federal chartering of insurance firms. Legislation isn't likely to find the President's desk, but it is anticipated that Chairman Johnson will convene high profile hearings on the issue.
Though major reform legislation is now law, the debate over new rules for the financial services industry is far from over.