Dodd Offers Regulation Bill 11 comments
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Sen. Christopher Dodd (D, Connecticut), Chairman of the Senate Banking Committee, has offered legislation that would extensively revamp regulation of U.S. banks. Stacey Kapur, at American Banker, has a complete review of the proposal (here). This is a subscription service and, if access is not available, the article can also be found at Financial-Planning.com (here).
The Dodd reforms go far further than other proposals from the House Financial Services Committee, Chairman Barney Frank (D, Massachusetts) and the Obama administration. Some of the specifics:
- Strip the Federal Reserve Board of supervisory responsibilities for bank holding companies and state banks.
- Remove supervisory responsibility from the FDIC (Federal Deposit Insurance Corp.}.
- Abolish the OTS (Office of Thrift Supervision).
- Abolish the OCC (Office of the Controller of the Currency).
- Form a new agency, the FIRA (Financial Institutions Regulatory Administration).
- Implement FSA (Financial Stability Agency) to regulate systemic risk.
- Require "living wills" for large, complex companies. This has also been proposed in the UK. See this.
- Form a CFPA (Consumer Financial Protection Agency).
- Establish a National Insurance Office to monitor the activities of insurance regulation now entirely in the hands of the individual states.
The administration has previously proposed legislation to establish a federal CPA which would become part of this new regulatory structure. See this.
The "New" Federal Reserve
Under the proposal, the Fed would retain responsibility for formulating monetary policy. The Fed would no longer have supervisory responsibilities over banks, a responsibility that they have obviously nor exercised well. The Fed has proposed that their supervisory powers be increased to "enable better supervisory activities". This bill goes in the opposite direction. Since the Federal Reserve is basically an industry organization of the banks, this legislation would essentially remove the self-regulation of banking that has existed since 1913. FIRA would assume these responsibilities.
The "New" FDIC
The FDIC would become simply an insurance agency and the resolution agency for failed insured banks. The regulation and supervision of FDIC member banks would become the responsibility of FIRA.
FIRA
The Financial Institutions Regulation Administration would be composed of the following:
- a board headed by an independent chairman (appointed by the president and confirmed by the Senate) and five members - a vice chairman (representing state banking expertise), two independent directors, the Fed Chairman and the head of the FDIC;
- a bank supervision agency;
- regulations aimed at preserving the community banking system, along side the large commercial banking system (dual banking system};
- a consolidated community bank division.
Essentially, FIRA would replace, with a single agency, the supervisory responsibilities formerly with the Fed and FDIC.
FSA
The Financial Stability Agency would be charged with identifying systemic risks. The FSA would be the agency for very large financial institutions corresponding to the FDIC for smaller banks. It would have rule writing authority but no supervision power. It would have the responsibility for resolution of failed institutions, with the explicit authority to seize and break up systemically risky firms.
All costs for dismantling seized firms would come from assessments after the collapse on institutions with over $10 billion of assets. Firms would be required to issue long-term hybrid debt securities to set up capital reserves to be tapped during an emergency.
The agency would be headed by a nine member board, with an independent chair and including the heads of the Fed, Treasury, FDIC, FIRA, the CPA, the SEC (Securities and Exchange Commission) and the CFTC (Commodity and Futures Trading Commission). The board would be supported by a council staffed by a group of economists, accountants, lawyers, former supervisors, and other specialists. In addition to the power to break up systemically risky firms, the FSA could force them to increase their capital, and limit their growth.
All firms above a certain size would be required to have written "funeral" plans ("living wills") that prescribe the processes for dissolution should they become too risky. In addition, mortgage originators would be required to retain at least 10% of all mortgages originated.
Consumer Financial Protection Agency
The CFPA would be led by a five-member board, including the chairman of FIRA and led by an independent director. Consumer protections against financial misdeeds would be the purview of this agency, covering credit cards, mortgages and other financial products. The proposed legislation would allow states to set and enforce tougher consumer protection standards affecting national and state banks. Defense by banks against state regulations on the basis that the states exceeded federal requirements would be prohibited.
Questions Remain
Some of the issues that have to be resolved include:
- Does the proposed legislation provide too much political control over banking? Is this potentially more problematic than the self-regulation that got us to this point?
- Can the community banks really be given fair treatment is a financial system dominated by giants and the influence over government of their billions?
- How can regulatory abuse be avoided? How can regulatory capture be avoided? Where are the checks and balances?
- Why can't the risks be segregated to individual firms so that risks are individually born, rather than systemic? Why can the vestiges of monopoly be discarded and free competition restored?
- Is free enterprise in financial markets an unreachable idealistic dream?
This situation should involve a lot of soul searching . But maybe our financial souls have already been sold. But to whom or what?
Opposition
According to a news release from Reuters by Kevin Drawbaugh (here), there is widespread opposition to the Dodd proposed bill. There is no Republican support. Lobbyists for both large and small banking groups don't like the single bank regulator proposal. Insurance groups have questioned parts of the bill. According to Reuters, opponents are "trying to preserve the status quo".
While all this debate is going on, why don't we just pass Bernie Sanders' bill and hit the central problem? See James Kwak's listing of all 17 lines of the proposed legislation here.
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This article has 11 comments:
This is probably another complex Rube Goldberg bureaucratic construction designed with evasion by insiders in mind. Like Barney Frank "incorporating language" from the forthright Ron Paul Fed Transparency Act H.R. 1207 for his own, more evasive bill, this is likely meant to take the wind out of Bernie Sander's simple Too Big To Fail Act.
I think of the monstrosity (in many ways) of the Patriot Act, the obscenity of the bailout and stimulus bills and the 3,000 pages of "healthcare" legislation when I think of any of these political creatures in Congress now. If it isn't simple (and it never is for all but a very few there), it is a scam and a swindle that we can't afford much more of.
He takes money from entities that he regulates, and then does what he is paid to do and hurts the American people.
He betrays the people that he serves and that trust him.
He is worse than a child molester.
This is our corrupt Washington leaders demonstrating precisely how the corruption works. I am sure Dodd is collecting big bribes (campaign contributions) submitting this garbage.
I agree with Leftfield.
Dodd is proposing something so disgusting to the industry that he'll rake in millions from them to have it killed.
Considering that the industry is afloat with taxpayer dollars, it is us unwashed out here that are paying for his re election campaign.
He may as well abolish FNM and FRE. Their usefulness has long expired. Instead of aiming for something useful and concrete, Dodd is simply another corrupt politician playing the power game in the Byzantine corridors of Washington.
Caveat: Washington's opinion is something like what I expressed here, but maybe said more clearly.
But Dodd figuring out how to put our financial regulatory house in order?
It is to laugh.
On Nov 11 08:06 AM doubleguns wrote:
> Tie up any attempts to regulate with added confusing bills and regulation.
> Lots of pages that will have to be read, negotiated and eventually
> voted on or not. This is Dodd delivering nothing but more red tape
> to ensure the status quo.
>
> This is our corrupt Washington leaders demonstrating precisely how
> the corruption works. I am sure Dodd is collecting big bribes (campaign
> contributions) submitting this garbage.
let me sidestep the rhetoric on dodd for a minute and observe the following:
1) our system is broken. we have tbtf institutions, political graft, and self-regulation / no regulation / over regulation issues.
2) we just had a financial meltdown which pretty much confirms point #1.
3) we seem incapable of legislating a fix.
why do we not appoint a commission to explore the financial meltdown and put together a fix - which congress cannot alter - only vote up or down.
this at least removes the financial incentives for congress to act against america's best interests.