US Senate Debates Bank Regulation Bill

by Mike Godfrey, for LawAndTax-News.com

11 May 2010

While the Republican party in the Senate has allowed discussion to begin on significant reforms to the regulation of the US financial system, there is still much debate to be had on the bill presented by the Democrat chairman of the Senate Committee on Banking, Chris Dodd, before its final version can be agreed.

The concession by the Democrats that appeared to break the deadlock over the bill was to remove reference to a USD50bn fund that would have been provided, through contributions by the banking system, for the break-up of failed institutions. A further amendment also agreed between Senator Dodd and Senator Richard Shelby, the leading Republican on the Banking Committee, re-emphasized that no public funds could be used in the future to bail out any bank.

In addition, a further amendment passed with the support of both parties is aimed at preventing any financial institution from becoming “too big to fail”, and on putting provisions for orderly liquidation and emergency liquidity programmes into the bill.

As explained by Senator Dodd: “There will be an orderly liquidation mechanism for Federal Deposit Insurance Corp (FDIC) to unwind failing systemically significant financial companies. Secondly, shareholders and unsecured creditors will still bear losses and management will be removed. Third, regulators will still have the authority to break up a company if it poses a grave threat to the financial stability of the United States.”

“Large bank holding companies that have received Troubled Asset Relief Program funds will still not be able to avoid Federal Reserve supervision by simply dropping their banks,” he added. “Most large financial companies are still expected to be resolved through the bankruptcy process. And the bill will continue to eliminate the ability of the Federal Reserve to prop up failed institutions.”

An amendment introduced by Senator Barbara Boxer to “prohibit taxpayers from ever having to bail out the financial sector” was also approved, almost unanimously. However, the bipartisan approach seems likely to end there.

Already, a further amendment sponsored by Senator Selby has been rejected. It would have restricted the operations of the new independent watchdog to be established by the bill to protect consumers. The Senate also voted down a proposal which would have placed a maximum size on financial institutions, and which would have immediately reduced the largest US banks. Other minor amendments were approved, or accepted after modification.

It is now expected that debates on the bill in the Senate will last for another week. The House of Representatives has approved its own bill on the subject, and the two will eventually have to be reconciled. However, there does now appear to be overwhelming support, particularly outside Congress, for strengthening banking regulation; it is now only the detail that is under discussion.

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