Finance reform bill leaves some key decisions to regulators
Saturday, May 8, 2010
Rather than tackling some of the most crucial issues facing Wall Street and the financial system, the pending Senate bill aimed at overhauling financial regulation would instead punt on several of those questions.
From limiting the risky activities of big financial firms to setting precise capital standards for banks, the legislation would leave it to regulators to study a range of topics and make those critical decisions on their own. By leaving some key elements intentionally vague, the bill's authors hope to give regulators the flexibility to adapt to a fast-moving business world, lawmakers and their aides say.
That fill-in-the-blank approach to some issues, however, could leave the new regulatory framework vulnerable to lobbying by industry officials, who are far more comfortable making their case with regulators than with lawmakers on Capitol Hill, administration and industry officials say. Many bank supervisors, in fact, work every day inside the headquarters of the biggest financial firms and have built close relationships with executives of the companies they oversee.
Treasury officials say they plan to use a new council of senior government officials to press regulators to adopt tough standards and resist undue lobbying from big financial firms. But that moral suasion might be limited after the legislation passes. While Treasury officials were able to craft much of the Senate bill's language, bank regulators are supposed to act independently from the White House or political appointees, such as the Treasury secretary.
'The start, not the end'
If the bill passes, it would launch one of the biggest regulatory reorganization efforts Washington has seen in years. New agencies, such as a consumer financial protection regulator, would be established. Long-standing bank regulators would be combined. Regulators would have to launch more than 20 studies on controversial topics, such as new curbs on short-sales of stock and how much cash reserves large non-bank financial companies should hold.
"Everyone assumes, there's a ton of stuff that will be finalized in the bill," said a senior administration official, who spoke on the condition of anonymity. "The bill is the start, not the end. It will set in motion a huge array of discussions."
Administration officials say one of the most scrutinized debates will be over new capital standards that regulators would need to set for the banking industry. The more money that banks set aside, the less they have available to generate profits. Before the financial crisis, regulators did not require big financial firms to sock away enough money, administration officials have said. As a result, when the credit markets tightened, major banks came close to failing -- and nearly brought down the entire financial system.
The Senate bill cedes the setting of new capital levels to an ongoing international effort led by a group based in Switzerland called the Basel Committee on Banking Supervision. Lawmakers and administration officials say that such standards need to be coordinated across borders, otherwise banks will move to countries with the weakest rules.
But establishment of capital standards is expected to take time, which might give banks a chance to influence the outcome. They will not only be able to lobby the committee in Switzerland but also can register their concerns in each country adopting the new rules. The Basel Committee does not have the power to force countries to adopt its standards.
The Senate's regulatory reform bill also gives broad authority to a council of regulators to shape what is known as the "Volcker Rule." The provision, pushed by former Federal Reserve chairman Paul A. Volcker, would ban banks from risky activities such as owning hedge funds and private equity funds. But defining what entails a risky activity is expected to be the subject of an intense battle between the industry and the rule's advocates.
The Senate bill would direct a council of regulators to conduct a six-month study of the matter and empower it to make recommendations. It then gives bank supervisors nine months to turn the council's recommendations into a final rule. Finally, after another two years, the Volcker Rule would come into effect.
In each stage of those discussions, industry officials will have the ability to meet with regulators, submit public comment and influence the final result.
Treasury Secretary Timothy F. Geithner plans to be closely involved as these rules develop, his aides said. Geithner, former president of the Federal Reserve Bank of New York, which regulated some of the nation's largest banks, is respected among bank supervisors, given his experience. But he could also face pushback from these regulators. Several officials, speaking on condition of anonymity, said they hope the specifics of setting capital standards would be left to the regulators.
"Treasury is a political agency," said one government source, who spoke on condition of anonymity because of the sensitivity of the matter. Banking supervisors "have vast amounts of expertise in setting these kinds of capital rules. Treasury is not a regulator."