Regulatory Reform: A Threat to Banks?

Critics: New Bill Would Overburden Community Institutions Congressional leaders negotiated in a 20-hour marathon session to bring sweeping changes to proposed regulations to protect the banking industry. But these changes -- the biggest overhaul since the 1930s -- may be the final straw for small banks already overburdened with regulations, critics say.

Legislators agreed on two major changes - new oversight of derivatives trading and a ban on proprietary trading by banks. Congress had earlier decided to bring changes to the handling of "too big to fail" firms, hedge fund rule changes, and changes to how credit raters are viewed in the market.

To reach this compromise, lawmakers worked for two weeks, merging two versions of the reform bills that were passed by the House and Senate. An approval vote now needs to be passed by both bodies, and legislators have stated they hope to have the final bill presented to President Obama by July 4.

The wide-reaching bill, called the Dodd-Frank bill, seeks to:

  • Create a separate consumer protection agency watchdog;
  • Cut risk-taking by banks;
  • Increase surveillance of new and emerging threats, aiding regulators when they need to step in to avoid collapses of large firms.

'Rearranging Regulatory Furniture'

The Dodd-Frank bill is questioned by some industry experts who say it accomplishes little more than the "rearranging of regulatory furniture."

"None of the changes address the major issues that led to the last crisis in a significant way," says former FDIC chairman William Isaac. The changes create more regulation on an already overburdened industry, and Isaac says the reform movement will create an uneven playing field, with more consolidation of banks taking place as a result.

Ed Yingling, president of the American Bankers Association, says some of the changes being championed in the bill "run far afield from Wall Street reform and will ultimately harm Main Street."

Yingling says the bill will add over 1000 pages of new regulation for even the smallest bank. "As a result of this volume and the new restrictions, many small banks are telling us they will simply have to sell out to larger institutions that have the staff to deal with the massive volume of new reports and rules."

Elements of the New Bill

Some of the reforms in the combined Frank-Dodd bill include:

  • Uber Regulator - Establishing a new council of "systemic risk" regulators to oversee risks in the system. This "Super Regulator" will be led by Treasury and have representation from the other agencies;
  • Consumer Protection - Creation of the Consumer Financial Protection Agency, an agency that would oversee and enforce rules that stop abusive practices in the industry starting with lending and credit card practices;
  • Risk Protection - Giving the Federal Reserve the power to oversee the biggest institutions to prevent risks spilling over into the overall economy;
  • Govt Intervention - Allowing the government to step in and sell off parts of a troubled institution to protect taxpayer money to keep it from failing;
  • Derivatives - Agencies are empowered to regulate and oversee the giant derivatives market. This will increase transparency of transactions. Regulators would make most contracts be traded through third-parties rather than current practices where banks trade directly with customers. Speculative trading in derivative contracts led to huge losses at many banks during the 2008 financial crisis;
  • Bank Investments - Banks will be able to invest in private-equity and hedge funds, but they will be limited to adding no more than 3 percent of their own money to the fund's capital. Banks also won't be allowed to invest more than 3 percent of their Tier 1 capital.
  • Swipe Fees - Credit and debit cards "Swipe" fees and limits will be overseen by the Federal Reserve. It will have the authority to limit the interchange fees charged to merchants for debit-card transactions.

About the Author

Linda McGlasson

Linda McGlasson

Managing Editor

Linda McGlasson is a seasoned writer and editor with 20 years of experience in writing for corporations, business publications and newspapers. She has worked in the Financial Services industry for more than 12 years. Most recently Linda headed information security awareness and training and the Computer Incident Response Team for Securities Industry Automation Corporation (SIAC), a subsidiary of the NYSE Group (NYX). As part of her role she developed infosec policy, developed new awareness testing and led the company's incident response team. In the last two years she's been involved with the Financial Services Information Sharing Analysis Center (FS-ISAC), editing its quarterly member newsletter and identifying speakers for member meetings.

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