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US Congress Finalizes Bank Reform Bill,
by Glen Shapiro, LawAndTax-News.com, New York
Tuesday, June 29, 2010
A committee from both the House of Representatives and the Senate has finalized
the terms of the bill that will make considerable regulatory changes to the
United States financial system, and includes a levy on financial institutions
to pay for the additional cost involved.
Apart from the section of the bill providing increased consumer financial protection,
its important changes include: a restriction on US banks’ ability to trade
derivatives and to take risks by trading on their own accounts; powers given
to regulators to wind up failed institutions; stricter controls through a new
regulatory body; and action on bankers’ remuneration.
The bill will create a Financial Stability Oversight Council to monitor the
market to identify potential threats to the stability of the financial system.
Through the Federal Reserve, that Council will subject financial companies that
it judges to pose a threat to financial stability to much stricter standards
and regulation, including higher capital requirements, leverage limits, and
limits on concentrations of risk.
The proposed legislation, significantly, imposes risk retention on all lenders.
For the first time banks will be required to retain a portion of the risk they
generate, in order to provide real market discipline for underwriting decisions.
New rules will require institutions to retain at least 5% of the credit risk
associated with any loans that are transferred, sold or securitized.
Tough restrictions are to be imposed on government assistance in times of crisis
so as to eliminate bailouts. Official guarantees will only be given to solvent
banks in a liquidity crisis, and will be funded by fees paid by those banks.
The bill provides for the orderly dissolution of failing firms, ending “too
big to fail”. When a firm enters the dissolution process, management responsible
for the failure will be dismissed, parties that should bear losses - particularly
shareholders and unsecured creditors - will do so, and the firm will cease as
a going concern.
Any dissolution shortfall will be repaid by assessments on all large financial
firms – not by the taxpayer. A Systemic Dissolution Fund, pre-funded by
a levy on financial companies with more than USD50bn, and by hedge funds with
more than USD10bn, in assets, would be used to pay creditors and help wind down
failing financial institutions, but not to preserve them. It has been estimated
that the total of that levy could reach around USD19bn.
There will be, for the first time, a comprehensive system of regulation of
the over-the-counter derivatives market, requiring clearing and trading on exchanges
or electronic platforms for all standardized transactions, including swaps and
credit derivatives, between dealers and other large market participants. Counterparties
will have to comply with transaction reporting requirements established by regulators.
Implementing a modified Volcker rule, banks will not be able to trade derivatives
for their own account, unless they are considered low risk and necessary for
their internal risk management purposes. Riskier derivatives, such as those
linked to energy or commodities, will only be tradable by banks through subsidiaries,
set up by them and using their own capital.
The bill also fills a hole that allows hedge funds and their advisers
to escape regulation. Now, all investment advisers to private funds with over
USD150m in assets under management will be required to register with the US
Securities and Exchange Commission. Banks will also be limited to investing a maximum of 3% of their core capital
in such hedge funds or private equity funds.
In addition, with regard to pay structures, all financial institutions with
more than USD1bn in assets will be required to disclose remuneration arrangements
that include any incentive based elements. Federal regulators would be authorised
to ban inappropriate or imprudently risky compensation practices.
Overall, while some banks may be forced to restructure some of their business,
the bill does not include some of the more draconian measures that had been
previously mentioned, such as breaking the link between the banks’ commercial
and investment banking operations.
However, the US Treasury Secretary, Tim Geithner, called the bill “strong”.
He said that “it represents the most sweeping set of financial reforms
since those that followed the Great Depression. It prevents financial firms
from taking risks that will threaten the economy. And it provides the government
with significant new tools to better protect taxpayers from the damage of future
financial crises.”
President Obama reiterated that Congress had finalized a “strong Wall
Street reform bill”, and urged it “to finish the job" and send the
bill to his desk. It is now expected that Congress will approve the bill
in its revised form in the next few days and send it to the President by July
4.
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