US Financial Bill Enters Final Straight

by Glen Shapiro, LawAndTax-News.com, New York

11 June 2010

Negotiators from the United States Senate and the House of Representatives will this week begin their attempt to produce an amalgamated financial regulations bill from those separately approved by the two chambers.

The Restoring American Financial Stability bill was passed by the Senate on May 20 after securing vital Republican votes. Its companion legislation, the Wall Street Reform and Consumer Protection Act, had already been passed in the House of Representatives in December last year. It is now down to Representative Barney Frank and Senator Christopher Dodd, both Democrats and the prime movers of the bills in their respective parts of Congress, to lead the job of reconciling their work.

It has been judged that the joint bill will put a rein on banking profits, rather than fundamentally changing their businesses, but that does not mean that the larger Wall Street banks will not be lobbying for substantial changes. However, the politicians are also under pressure from public opinion to demonstrate some firm action in controlling financial risks.

Discussions are more than likely over the banks’ trading of derivatives, such as credit default swaps, on their own books, rather than for customers, and the higher capital that they should set aside. However, the possibility that banks will be forced to divest their swap-trading desks seems to have receded, and efforts will be concentrated instead on directing swaps through channels which are open to public scrutiny, such as electronic trading platforms and clearing houses.

In addition, the Senate bill contains a variant of the so called “Volcker rule,” which directs regulators to limit the size and scope of banks' investment activities. The regulators would be tasked to create regulations that would stop banks from owning hedge funds and trading for their own accounts. The House bill also contains elements of the Volcker proposals, but does not go as far as the Senate's legislative text, and this could prove a source of dispute between the conferees.

In the event, it is expected that, as the bill will still need some Republican support for its final passage to be possible, the need to obtain such broad support for its final agreement will mean that changes to it from either side will not be fundamental. In any case, the passage of the bill will receive the strong backing of President Obama, who is regarding it as a high priority.

Barney Frank, the joint committee chairman, is reported to be hoping to complete its work by June 26, when the G20 group of countries are due to meet in Toronto and have further discussions on global financial regulation. A completed US financial reform package could be useful for President Obama in those negotiations.

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