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U.S. financial regulation reform proposals
By Martin | January 12, 2010
The U.S. Senate will renew efforts this month to overhaul financial regulation, basing much of its work on a bill offered by Democratic Senator Christopher Dodd, who announced this week he will retire at the end of 2010.
Like legislation approved on Dec. 11 by the U.S. House of Representatives, the Dodd bill proposes the biggest regulatory changes since the 1930s for Wall Street and the banks.
Below is a summary of the House and Senate proposals.
SYSTEMIC RISK:
HOUSE BILL
* House bill creates inter-agency Financial Services Oversight Council with staff drawn from existing agencies
* Council members include heads of Treasury, Federal Reserve, SEC, FDIC, others; Fed acts as council agent
* Council can recommend that existing agencies impose stricter standards on large, interconnected financial firms that could threaten economic stability or that are troubled
* Fed limits leverage of financial holding companies subject to stricter standards at 15-to-1 debt-to-equity ratio
* Fed sets minimum capital ratio for financial holding companies that are subject to stricter standards at 2 percent of tangible equity to total assets
* Fed can impose other leverage, capital, liquidity rules on firms, taking off-balance sheet activities into account
* Fed can prohibit firms subject to stricter standards from proprietary trading done in-house using firms’ own money
* Firms subject to higher standards face routine “stress tests;” must submit “living wills” on unwinding quickly
* Firms can be ordered to hold contingent capital, or long-term hybrid debt convertible to equity in emergencies
* Firms failing to comply can be ordered to restructure, curb executive pay, sell businesses or otherwise break up
* Treasury secretary must approve any order to divest more than $10 billion in assets; president, more than $100 billion
DODD BILL
* Creates Agency for Financial Stability, governed by board similar to House’s council, also with rule-writing power only
* Agency relies less on Fed, more on new single bank regulator and FDIC to execute and enforce its orders
* Imposes incrementally tighter standards on firms with total assets above $10 billion as they present more risk to financial stability
* Regulators can impose tighter balance-sheet rules and “living will” requirements on firms, resembling House bill
* Regulators can force firms not complying with tighter rules, or that threaten stability, to recapitalize, be acquired, restructure, curb pay, dismiss executives, break up
* Firms’ credit exposure to unaffiliated companies can be limited to 25 percent of capital stock, as in House bill
DEALING WITH LARGE TROUBLED FINANCIAL FIRMS:
HOUSE BILL
* FDIC — with approval of council, Treasury and president — can guarantee debts of solvent firms up to $500 billion
* FDIC can dismantle insolvent firms through bankruptcy or receivership, much like it dismantles failing banks now
* Secured creditors in FDIC resolutions can have up to 10 percent of their claims treated as unsecured claims
* $200 billion fund pays for FDIC resolutions; fund gets up to $150 billion from fees charged to firms worth more than $50 billion, can borrow another $50 billion from Treasury; hedge funds’ worth $10 billion or more pay into fund
DODD BILL
* FDIC can guarantee debts of firms in receivership, with approvals from senior officials
* FDIC can dismantle large troubled financial firms
* Firms with assets above $10 billion pay fees for FDIC resolutions after they occur, not before, unlike House bill
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