Congress moves closer to remaking US financial system
Monday, 28 June 2010
Andrzej Zwaniecki
Far-reaching financial system reform is taking shape in the United States as a newly passed Senate bill is being reconciled with an earlier House of Representatives measure.
The bills - passed by the Senate May 20 and the House in December 2009 - aim to overhaul the financial regulatory system and, consequently, the financial industry, in a way that would make an economic crisis like the one in 2008 less likely in the future. The two versions of legislation must be reconciled through negotiations between representatives of the two chambers and a final measure must be passed by each chamber before the president can take action.
Morris Goldstein of the Peterson Institute for International Economics said it will not be difficult to achieve reconciliation.
Senator Christopher Dodd (Democrat from Connecticut), chairman of the Senate Banking Committee, who together with Representative Barney Frank (Democrat from Massachusetts), chairman of the House Financial Services Committee, will lead the negotiations, said he expects the final bill to be ready for the president's signature before July 4. "This is one of those rare occasions when the two bills really are very close to each other," Dodd said.
Both bills seek to ensure that troubled financial institutions can be liquidated at no cost to taxpayers. The measures would empower regulators to seize such companies - no matter how big or complex - break them apart and sell off their assets. The bills also would address finance-related risks to the entire financial system, and consequently to the entire economy, that so far have not been monitored by any regulator. A new government body would be authorized to set up an early warning system for emerging systemic risks.
Both bills would establish new rules on trading of complex financial instruments called derivatives. Trading in derivatives is considered a major contributing factor to the recent financial crisis. The bills also would create a new government agency designed to ensure integrity and transparency in consumer financial products such as home mortgages, auto loans and credit cards.
The two bills differ, however, on some key details. Among major issues that the banking industry's lobbyists and consumer advocates will focus on now are questions such as funding for potential government efforts to close faltering financial institutions; whether a consumer financial protection regulator should be a stand-alone agency; whether banks should be prohibited from making market bets with their own money, as opposed to trading on behalf of their clients; and whether big banks should be forced to spin off some of their derivatives business into separate businesses.
The financial services industry, Republicans and some experts who have criticized the Senate measure as over-reaching and misguided have argued that the newly passed Senate bill would hurt the U.S. economy. "The cost of doing business in the U.S. just increased enormously, as did the odds of a double-dip recession," said Kevin Hassett of the American Enterprise Institute (AEI) after the Senate approved the bill. His comments, published on the institute website, reflect the belief of many in the Republican Party and banking industry. AEI is a conservative policy research group.
Goldstein, of the more liberal Peterson Institute, said, however, that "a strong response was necessary" because not more than a year and half ago the U.S. financial system was on the verge of collapse.
Neither of the two versions includes more populist or radical measures, such as a tax on financial transactions or on executives' and traders' bonuses, which have been proposed by European governments. Some experts said large banks and other financial companies will adapt to any new law by finding loopholes in its regulations to create new sources of profit.
That is why - whatever shape of the final bill -a new financial law should be considered a necessary, but not sufficient, step to prevent future financial crises, said Doug Rediker of the New America Foundation, a liberal policy research group. The effectiveness of a new law aimed at preventing such crises will depend on how regulators use their discretion, he said.
"It is going to require more vigilant and empowered regulators," Rediker said. He said new bodies such as a financial oversight council and a consumer financial protection agency must have authority not only to watch Wall Street and Main Street, or consumers, but also to set standards and aggressively go after those institutions and products that make risk unwieldy or provide shoddy services or products.
This is a product of the Bureau of International Information Programs, US Department of State. Courtesy: The US Embassy in Dhaka
Far-reaching financial system reform is taking shape in the United States as a newly passed Senate bill is being reconciled with an earlier House of Representatives measure.
The bills - passed by the Senate May 20 and the House in December 2009 - aim to overhaul the financial regulatory system and, consequently, the financial industry, in a way that would make an economic crisis like the one in 2008 less likely in the future. The two versions of legislation must be reconciled through negotiations between representatives of the two chambers and a final measure must be passed by each chamber before the president can take action.
Morris Goldstein of the Peterson Institute for International Economics said it will not be difficult to achieve reconciliation.
Senator Christopher Dodd (Democrat from Connecticut), chairman of the Senate Banking Committee, who together with Representative Barney Frank (Democrat from Massachusetts), chairman of the House Financial Services Committee, will lead the negotiations, said he expects the final bill to be ready for the president's signature before July 4. "This is one of those rare occasions when the two bills really are very close to each other," Dodd said.
Both bills seek to ensure that troubled financial institutions can be liquidated at no cost to taxpayers. The measures would empower regulators to seize such companies - no matter how big or complex - break them apart and sell off their assets. The bills also would address finance-related risks to the entire financial system, and consequently to the entire economy, that so far have not been monitored by any regulator. A new government body would be authorized to set up an early warning system for emerging systemic risks.
Both bills would establish new rules on trading of complex financial instruments called derivatives. Trading in derivatives is considered a major contributing factor to the recent financial crisis. The bills also would create a new government agency designed to ensure integrity and transparency in consumer financial products such as home mortgages, auto loans and credit cards.
The two bills differ, however, on some key details. Among major issues that the banking industry's lobbyists and consumer advocates will focus on now are questions such as funding for potential government efforts to close faltering financial institutions; whether a consumer financial protection regulator should be a stand-alone agency; whether banks should be prohibited from making market bets with their own money, as opposed to trading on behalf of their clients; and whether big banks should be forced to spin off some of their derivatives business into separate businesses.
The financial services industry, Republicans and some experts who have criticized the Senate measure as over-reaching and misguided have argued that the newly passed Senate bill would hurt the U.S. economy. "The cost of doing business in the U.S. just increased enormously, as did the odds of a double-dip recession," said Kevin Hassett of the American Enterprise Institute (AEI) after the Senate approved the bill. His comments, published on the institute website, reflect the belief of many in the Republican Party and banking industry. AEI is a conservative policy research group.
Goldstein, of the more liberal Peterson Institute, said, however, that "a strong response was necessary" because not more than a year and half ago the U.S. financial system was on the verge of collapse.
Neither of the two versions includes more populist or radical measures, such as a tax on financial transactions or on executives' and traders' bonuses, which have been proposed by European governments. Some experts said large banks and other financial companies will adapt to any new law by finding loopholes in its regulations to create new sources of profit.
That is why - whatever shape of the final bill -a new financial law should be considered a necessary, but not sufficient, step to prevent future financial crises, said Doug Rediker of the New America Foundation, a liberal policy research group. The effectiveness of a new law aimed at preventing such crises will depend on how regulators use their discretion, he said.
"It is going to require more vigilant and empowered regulators," Rediker said. He said new bodies such as a financial oversight council and a consumer financial protection agency must have authority not only to watch Wall Street and Main Street, or consumers, but also to set standards and aggressively go after those institutions and products that make risk unwieldy or provide shoddy services or products.
This is a product of the Bureau of International Information Programs, US Department of State. Courtesy: The US Embassy in Dhaka