Factsheet: Senate Financial-Regulation Bill
Sen. Christopher Dodd (D., Conn.) unveiled a sweeping financial-regulation bill Monday. The following is the fact sheet for the legislation provided by Senate Banking Committee.
Two years ago today, Bear Stearns was collapsing. In the time since, Americans have faced the worst financial crisis since the Fantastic Depression. Millions have lost their jobs, businesses have failed, housing prices have dropped, and savings were wiped out.
The failures that led to this crisis require bold action. We must restore responsibility and accountability in our financial system to give Americans confidence that there is a system in house that facility for and protects them. We must make a sound foundation to grow the economy and make jobs.
HIGHLIGHTS OF THE NEW BILL
Consumer Protections with Authority and Independence: Makes a new independent watchdog, housed at the Federal Reserve, with the authority to ensure American consumers get the apparent, accurate information they need to shop for mortgages, credit cards, and other financial products, and protect them from veiled fees, abusive terms, and deceptive practices.
Ends Too Huge to Fail: Ends the possibility that taxpayers will be questioned to write a check to bail out financial firms that threaten the economy by: making a safe way to liquidate failed financial firms; imposing tough new capital and leverage requirements that make it undesirable to get too huge; updating the Fed?s authority to allow system-wide support but no longer prop up individual firms; and establishing rigorous standards and supervision to protect the economy and American consumers, investors and businesses.
Advanced Warning System: Makes a assembly to identify and address systemic risks posed by large, complex companies, products, and activities before they threaten the stability of the economy.
Intelligibility & Accountability for Exotic Instruments: Eliminates loopholes that allow risky and abusive practices to go on unnoticed and unregulated – including loopholes for over-the-counter derivatives, asset-backed securities, hedge assets, mortgage brokers and payday lenders.
Federal Bank Supervision: Streamlines bank supervision to make clarity and accountability. Protects the dual banking system that supports community banks.
Executive Compensation and Corporate Governance: Provides shareholders with a say on pay and corporate affairs with a non-binding vote on executive compensation.
Protects Investors: Provides tough new rules for intelligibility and accountability for credit rating agencies to protect investors and businesses.
Enforces Regulations on the Books: Strengthens oversight and empowers regulators to aggressively pursue financial fraud, conflicts of interest and management of the system that benefit special interests at the expense of American families and businesses.
STRONG CONSUMER FINANCIAL PROTECTION WATCHDOG
The new independent Consumer Financial Protection Bureau will have the sole job of protecting American consumers from unfair, deceptive and abusive financial products and practices and will ensure people get the apparent information they need on loans and other financial products from credit card companies, mortgage brokers, banks and others.
American consumers already have protections against faulty appliances, contaminated food, and perilous toys. With the creation of the Consumer Financial Protection Bureau, they?ll finally have a watchdog to oversee financial products, giving Americans confidence that there is a system in house that facility for them ? not just huge banks on Wall Street.
Why Change Is Needed: The economic crisis was driven by an across-the-board failure to protect consumers. When no one office has consumer protections as its top priority, consumer protections don?t get the attention they need. The result has been unfair and deceptive practices being allowed to spread unchallenged, nearly bringing down the entire financial system.
The Consumer Financial Protection Bureau
- Independent Head: Led by an independent director appointed by the President and confirmed by the Senate.
- Independent Budget: Dedicated budget paid by the Federal Reserve Board.
- Independent Rule Writing: Able to autonomously write rules for consumer protections governing all entities ? banks and non-banks ? offering consumer financial services or products.
- Examination and Enforcement: Authority to examine and enforce regulations for banks and credit unions with assets of over $10 billion and all mortgage-related businesses (lenders, servicers, mortgage brokers, and foreclosure scam operators) and large non-bank financial companies, such as large payday lenders, debt collectors, and consumer reporting agencies. Banks with assets of $10 billion or less will be examined by the appropriate bank regulator.
- Consumer Protections: Consolidates and strengthens consumer protection responsibilities currently handled by the Office of the Comptroller of the Currency, Office of Frugality Supervision, Federal Deposit Insurance Corporation, Federal Reserve, National Credit Union Administration, and Federal Trade Commission.
- Able to Act Quick: With this bureau on the lookout for terrible deals and schemes, consumers won?t have to wait for Congress to pass a law to be confined from terrible business practices.
- Educates: Makes a new Office of Financial Literacy.
- Consumer Hotline: Makes a national consumer complaint hotline so consumers will have, for the first time, a single toll-free number to report problems with financial products and services.
- Accountability: Makes one office accountable for consumer protections. With many agencies sharing responsibility, it?s hard to know who is responsible for what, and simple for emerging problems that haven?t historically fallen under anyone?s purview, to fall through the cracks.
- Facility with Bank Regulators: Coordinates with other regulators when examining banks to prevent undue regulatory burden. Consults with regulators before a proposal is issued and regulators could appeal regulations if they believe would place the safety and soundness of the banking system or the stability of the financial system at risk.
LOOKING OUT FOR THE NEXT BIG PROBLEM: ADDRESSING SYSTEMIC RISKS
The Financial Stability Oversight Assembly
The newly made Financial Stability Oversight Assembly will focus on identifying, monitoring and addressing systemic risks posed by large, complex financial firms as well as products and activities that spread risk across firms. It will make recommendations to regulators for increasingly stringent rules on companies that grow large and complex sufficient to pose a threat to the financial stability of the United States.
Why Change Is Needed: The economic crisis introduced a new term to our national vocabulary ? systemic risk. In July, Federal Reserve Governor Daniel Tarullo, testified that ?Financial institutions are systemically vital if the failure of the firm to meet its obligations to creditors and customers would have significant adverse consequences for the financial system and the broader economy.?
In small, in an interconnected global economy, it?s simple for some people?s problems to become everybody?s problems. The failures that brought down giant financial institutions last year also devastated the economic security of millions of Americans who did nothing incorrect ? their jobs, homes, retirement security, gone overnight.
The Financial Stability Oversight Assembly
- Expert Members: A 9 member assembly of federal financial regulators and an independent member will be Chaired by the Reserves Secretary and made up of regulators including: Federal Reserve Board, SEC, CFTC, OCC, FDIC, FHFA, the new Consumer Financial Protection Bureau. The assembly will have the sole job to identify and respond to emerging risks throughout the financial system.
- Tough to Get Too Huge: Makes recommendations to the Federal Reserve for increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity, with significant requirements on companies that pose risks to the financial system.
- Regulates Nonbank Financial Companies: Authorized to require, with a 2/3 vote, nonbank financial companies that would pose a risk to the financial stability of the US if they failed be regulated by the Federal Reserve. With this provision the next AIG would be regulated by the Federal Reserve.
- Break Up Large, Complex Companies: Able to approve, with a 2/3 vote, a Federal Reserve choice to require a large, complex company, to divest some of its holdings if it poses a grave threat to the financial stability of the United States ? but only as a last resort.
- Technical Expertise: Makes a new Office of Financial Research within Reserves to be staffed with a highly sophisticated staff of economists, accountants, lawyers, former supervisors, and other specialists to support the assembly?s work by collecting financial data and conducting economic analysis.
- Make Risks Transparent: Through the Office of Financial Research and member agencies the assembly will assemble and analyze data to identify and watch emerging risks to the economy and make this information public in periodic intelligence and testimony to Congress every year.
- Oversight of Vital Market Utilities: Identifies systemically vital clearing, payments, and settlements systems to be regulated by the Federal Reserve.
- No Evasion: Large bank holding companies that have received TARP assets will not be able to avoid Federal Reserve supervision by simply dropping their banks. (the Hotel California Provision)
ENDING TOO BIG TO FAIL BAILOUTS
Preventing another crisis where American taxpayers are forced to bail out financial firms requires strengthening huge financial companies to better withstand stress, putting a price on excessive progression or complexity that poses risks to the financial system, and making a way to shutdown huge financial firms that fail without threatening the economy.
Why Change Is Needed: As long as giant financial firms (and their creditors) believe the government will prop them up if they get into distress, they only have incentive to get larger and take larger risks, believing they will reap any rewards and leave taxpayers to foot the bill if things go incorrect. Since the crisis started, a number of financial institutions previously considered ?too huge to fail? have only grown larger by acquiring failing companies, leaving our country with the same vulnerabilities that led to last year?s bailouts.
Limiting Large, Complex Financial Companies and Preventing Future Bailouts
- Discourage Excessive Progression & Complexity: The Financial Stability Oversight Assembly will watch systemic risk and make recommendations to the Federal Reserve for increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity, with significant requirements on companies that pose risks to the financial system.
- Volcker Rule: Requires regulators to implement regulations for banks, their affiliates and bank holding companies, to prohibit proprietary trading, investment in and sponsorship of hedge assets and private equity assets, and to limit relationships with hedge assets and private equity assets. Nonbank financial institutions supervised by the Federal Reserve will also have restrictions on their proprietary trading and hedge fund and private equity investments. Regulations will be developed after a study by the Financial Stability Oversight Assembly and based on their recommendations.
- Extends Regulation: The Assembly will have the ability to require nonbank financial companies that pose a risk to the financial stability of the United States to surrender to supervision by the Federal Reserve.
- Funeral Plans: Requires large, complex companies to periodically surrender plans for their rapid and orderly shutdown should the company go under. Companies will be hit with higher capital requirements and restrictions on progression and endeavor, as well as divestment, if they fail to surrender acceptable plans. Plans will help regulators know the structure of the companies they oversee and give as a roadmap for shutting them down if the company fails. Significant costs for failing to produce a credible plot make incentives for firms to rationalize structures or operations that cannot be unwound easily.
- Orderly Shutdown: Makes an orderly liquidation mechanism for the FDIC to unwind failing systemically significant financial companies. Shareholders and unsecured creditors will bear losses and management will be removed.
- Liquidation Procedure: Requires Reserves, FDIC and the Federal Reserve all agree to place a company into the orderly liquidation process. A panel of 3 bankruptcy judges must convene and agree – within 24 hours – that a company is insolvent.
- Costs to Financial Firms, Not Taxpayers: Charges the largest financial firms $50 billion for an upfront fund, built up over time, that will be used if needed for any liquidation. Industry, not the taxpayers, will take a hit for liquidating large, interconnected financial companies. Allows FDIC to borrow from the Reserves only for working capital that it expects to be repaid from the assets of the company being liquidated. The government will be first in line for repayment.
- Limits & Disclosure for Federal Reserve Lending: Updates the Federal Reserve?s 13(3) lender of last resort authority to allow system-wide support for healthy institutions or systemically vital market utilities with sufficient collateral to protect taxpayers from loss during a major destabilizing event, but not to prop up individual institutions. The Board must commence reporting within 7 days of extending loans, periodically thereafter, and tell borrowers, collateral, amounts borrowed unless doing so would defeat the purpose of the support. Disclosure may be delayed 12 months if itwould negotiate the program or financial stability.
- Bankruptcy: Most large financial companies are expected to be resolved through the normal bankruptcy process.
- Limits on Debt Guarantees: To provide protection against bank runs, the FDIC can guarantee debt of solvent insured banks and thrifts and their holding companies only if the meet a run of serious checks: the Board and the Assembly determine that there is a threat to financial stability; the Reserves Secretary approves terms and conditions and determines a cap on overall guarantee amounts; the President must activate an expedited process for Congressional review of the amount and use of the guarantees; and fees are set to cover all expected costs and losses are recouped from users of the program.
IMPROVING BANK REGULATION
The bill will streamline bank supervision with apparent lines of responsibility, reducing arbitrage, and increase consistency and accountability. For the first time there will be apparent lines of responsibility among bank regulators.
Why Change Is Needed: Today, we have a convoluted system of bank regulators made by historical accident. There are 4 federal banking agencies that oversee large systemically significant and small local national and state banks and federal and state thrifts.
Experts agree that no one would have designed a system that looked like this. For over 60 years, administrations of both parties, members of Congress across the biased spectrum, commissions and scholars have proposed streamlining this irrational system.
- Apparent Lines of Responsibility: Replaces confusing regulation riddled with perilous loopholes, with apparent lines of responsibility.
- FDIC: will regulate state banks and thrifts of all sizes and bank holding companies of state banks with assets below $50 billion.
- OCC: will regulate national banks and federal thrifts of all sizes and the holding companies of national banks and federal thrifts with assets below $50 billion. The Office of Frugality Savings is eliminated, unfilled thrifts will be grandfathered in, but no new charters for federal thrifts.
- Federal Reserve: will regulate bank and frugality holding companies with assets of over $50 billion, where the Fed?s capital market experience will enhance its supervision. As a consolidated supervisor, the Federal Reserve can see risks whether they lie in the bank holding company or its subsidiaries. They will be responsible for finding risk throughout the system. The Vice Chair of the Federal Reserve will be responsible for supervision and will report semi-annually to Congress.
- Dual Banking System: Preserves the dual banking system, leaving in house the state banking system that governs most of our nation?s community banks.
CREATING TRANSPARENCY AND ACCOUNTABILTY FOR DERIVATIVES
Today?s bill largely reflects the November draft. Senators Jack Reed (D-RI) and Judd Gregg (R-NH) are working on a substitute amendment to this title that may be offered at full committee.
Under today?s proposal, common sense safeguards will protect taxpayers against the need for future bailouts and buffer the financial system from excessive risk-taking. Over-the-counter derivatives will be regulated by the SEC and the CFTC, more will be cleared through centralized clearing houses and traded on exchanges, un-cleared swaps will be theme to margin requirements and swap dealers and major swap participants will be theme to capital requirements, and all trades will be reported so that regulators can watch risks in this large, complex market.
Why Change Is Needed: The over-the-counter derivatives market has exploded? from $91 trillion in 1998 to $592 trillion in 2008. During the financial crisis, concerns about the ability of companies to make excellent on these contracts and the lack of intelligibility about what risks existed caused credit markets to freeze. Investors were worried to trade as Bear Stearns, AIG, and Lehman Brothers failed because any new transaction could expose them to more risk.
Over-the-counter derivatives are supposed to be contracts that protect businesses from risks, but they became a way for traders to make enormous bets with no regulatory oversight or rules and therefore exacerbated risks. Because the derivatives market was considered too huge and too interconnected to fail, taxpayers had to foot the bill for Wall Street?s terrible bets. Those terrible bets associated thousands of traders, making a web in which one default threatened to produce a chain of corporate and economic failures worldwide. These interconnected trades, coupled with the lack of intelligibility about who held what, made unwinding the ?too huge to fail? institutions more costly to taxpayers.
Bringing Intelligibility and Accountability to the Derivatives Market
- Closes Regulatory Gaps: Provides the SEC and CFTC with authority to regulate over-the-counter derivatives so that irresponsible practices and excessive risk-taking can no longer escape regulatory oversight. Uses the Administration?s outline for a joint rulemaking process with the Financial Stability Oversight Assembly stepping in if the two agencies can?t agree.
- Central Clearing and Exchange Trading: Requires central clearing and exchange trading for derivatives that can be cleared and provides a role for both regulators and clearing houses to determine which contracts should be cleared. Requires the SEC and the CFTC to pre-approve contracts before clearing houses can apparent them.
- Safeguards for Un-Cleared Trades: Requires margin for un-cleared trades in order to offset the greater risk they pose to the financial system and encourage more trading to take house in transparent, regulated markets. Swap dealers and major swap participants will be theme to capital requirements.
- Market Intelligibility: Requires data collection and publication through clearing houses or swap repositories to increase market intelligibility and provide regulators vital tools for monitoring and responding to risks.
HEDGE FUNDS
Hedge assets that manage over $100 million will be required to register with the SEC as investment advisers and to tell financial data needed to watch systemic risk and protect investors.
Why Change Is Needed: Hedge assets are responsible for huge transfers of capital and risk, but some operate outside the framework of the financial regulatory system, even as they have become increasingly interwoven with the rest of the country?s financial markets.
No regulator is currently able to assemble information on the size and nature of these firms or calculate the risks they pose to the broader economy. The SEC is currently unable to examine unregistered hedge assets? books and records.
Raising Standards and Regulating Hedge Assets
- Fills Regulatory Gaps: Ends the ?shadow? financial system in which hedge assets operate by requiring that they provide regulators with critical information.
- Register with the SEC: Requires hedge assets to register with the SEC as investment advisers and provide information about their trades and portfolios necessary to assess systemic risk. This data will be mutual with the systemic risk regulator and the SEC will report to Congress annually on how it uses this data to protect investors and market integrity.
- Greater State Supervision: Raises the assets threshold for federal regulation of investment advisers from $25 million to $100 million, a go expected to increase the number of advisors under state supervision by 28%. States have proven to be strong regulators in this area and subjecting more entities to state supervision will allow the SEC to focus its resources on newly registered hedge assets.
INSURANCE
Office of National Insurance: Makes a new office within the Reserves Department to watch the insurance industry, coordinate international insurance issues, and requires a study on ways to modernize insurance regulation and provide Congress with recommendations.
Streamlines the regulation of surplus lines insurance and reinsurance through state-based reforms.