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Senate votes to keep small banks under Federal Reserve's oversight

By Brady Dennis
Washington Post Staff Writer
Thursday, May 13, 2010; A10

The Federal Reserve would continue to oversee smaller banks around the country under a measure adopted Wednesday in the Senate, marking a major victory for the Fed as lawmakers prepare to overhaul the nation's financial regulations.

Under the bill originally introduced by Sen. Christopher J. Dodd (D-Conn.), the central bank would have been stripped of the ability to regulate all but the handful of banks that hold assets above $50 billion. The Fed's leaders had vehemently opposed that proposal, saying it would undermine the central bank's effectiveness.

Lawmakers agreed on Wednesday, passing 91 to 8 an amendment to keep the Fed as the primary supervisor of the thousands of smaller banks across the country.

"This amendment ensures that the nation's monetary policy is connected to Main Street and not just to Wall Street," said Sen. Amy Klobuchar (D-Minn.).

The vote followed a vigorous campaign by Fed leaders -- especially the heads of regional Fed banks, who would have lost most of their regulatory authority. They argued that their oversight of smaller banks provides them a better window into the internal functioning of the economy, noting that those banks have contributed to big economic problems in the past, such as in the 1930s and during the savings and loan crisis of the 1980s.

Proponents of shifting that oversight away from the Fed noted that the central bank regulators had made significant mistakes over the past decade, failing to rein in bad lending practices that contributed to the recent crisis.

On Wednesday, banking industry representatives quickly praised the vote.

"Preserving Fed supervision over smaller institutions means preserving its access to timely information about the flow of credit to small businesses and in communities of all sizes across the country," Edward L. Yingling, president of the American Bankers Association, said in a statement. "Community banks are vital to the economic health of the nation and issues that impact these banks and their communities should be a major factor in the Fed's decision making process."

The measure was one of a flurry of votes cast Wednesday as lawmakers continued to churn through proposed changes to a 1,400-page bill to overhaul financial regulations.

Democrats blocked an attempt by GOP lawmakers to insert their own vision to create oversight of the vast financial derivatives market. The amendment by Sen. Saxby Chambliss (R-Ga.) would have placed new reins on the largely opaque market, but it scaled back significantly from a version of a proposal by Sen. Blanche Lincoln (D-Ark.).

Republicans criticized Lincoln's measure as a regulatory overreach that would constrict credit to businesses that use derivatives to hedge legitimate risks -- such as an airline seeking predictable fuel prices -- rather than speculating. Democrats attacked the GOP proposal, saying it failed to bring the necessary transparency and accountability to the derivatives market.

The larger fight over how best to regulate the $600 trillion derivatives market remains unresolved. Regulators, administration officials and fellow lawmakers have taken aim at a portion of Lincoln's bill that could force big banks to spin off their derivatives operations, and Republicans have offered an amendment to strike that portion of the legislation.

Lawmakers also approved a proposal by Sen. Jeff Merkley (D-Ore.) to ban mortgage lenders and loan originators from receiving kickbacks for placing homeowners into higher-cost loans. The measure, which passed 63 to 36, seeks to end "liar loans," as they are called, by requiring lenders to ensure that borrowers have the ability to repay.

A parallel proposal by Sen. Bob Corker (R-Tenn.), which would have directed federal regulators to establish minimum loan-underwriting standards and required homeowners to come up with a minimum 5 percent down payment, failed 57 to 42.

Lawmakers passed an amendment proposed by Sens. Olympia J. Snowe (R-Maine) and Mary Landrieu (D-La.) clarifying that small, non-financial businesses will be exempt from oversight from a proposed consumer financial protection bureau. Business groups have complained that the new watchdog would burden small-business owners such as orthodontists, who played no role in the financial crisis.

The Snowe-Landrieu amendment would exempt a business if it meets a three-pronged test. It must sell non-financial products; it must not securitize its customers' debt; and it and must fall within the North American Industry Classification System's definition of a small business.

Late Wednesday, lawmakers voted 98 to 1 to create a liaison position within the new consumer bureau to look out for the interests of military families.

Staff writer Neil Irwin contributed to this report.

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