THE WALL STREET REFORM BILL: CONFERENCE UPDATE

Washington – Today House and Senate conferees again met on the bill to bring accountability to Wall Street.

 

The bill creates a new consumer financial protection watchdog, ends too big to fail bailouts, sets up an early warning system to predict and prevent the next crisis, and brings transparency and accountability to exotic instruments such as derivatives.

 

A list of House and Senate offers and counter offers can be found by clicking here.

 

But it is also important to remember the major issues being considered today as part of the base text.

 

·         Expert Members:  A 9 member council of federal financial regulators and an independent member will be Chaired by the Treasury Secretary and made up of regulators including: Federal Reserve Board, SEC, CFTC, OCC, FDIC, FHFA, and the new Consumer Financial Protection Bureau.  The council will have the sole job to identify and respond to emerging risks throughout the financial system. 

·         Tough to Get Too Big: 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, that a nonbank financial company be regulated by the Federal Reserve if its failure would pose a risk to the financial stability of the US. 

·         Funeral Plans: Requires large, complex financial companies to periodically submit plans for their rapid and orderly shutdown should the company go under.  Companies will be hit with higher capital requirements and restrictions on growth and activity, as well as divestment, if they fail to submit acceptable plans.  Plans will help regulators understand the structure of the companies they oversee and serve as a roadmap for shutting them down if the company fails.  Significant costs for failing to produce a credible plan create incentives for firms to rationalize structures or operations that cannot be unwound easily. 

·         Break Up Large, Complex Companies: Able to approve, with a 2/3 vote, a Federal Reserve decision 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: Creates a new Office of Financial Research within Treasury to be staffed with a highly sophisticated staff of economists, accountants, lawyers, former supervisors, and other specialists to support the council’s work by collecting financial data and conducting economic analysis. 

·         Make Risks Transparent: Through the Office of Financial Research and member agencies the council will collect and analyze data to identify and monitor emerging risks to the economy and make this information public in periodic reports and testimony to Congress every year.

·         No Evasion: Large bank holding companies that have received TARP funds will not be able to avoid Federal Reserve supervision by simply dropping their banks. (the “Hotel California” provision)

·         Capital Standards: Establishes a floor for capital that cannot be lower than the standards in effect today. 

·         Impact Protections, Systemic Risk Determination – makes additions that emphasize consideration of impact of regulatory policies and practices on low-income, minority or underserved communities.

·         No Taxpayer Funded Bailouts: Clearly states taxpayers will not be on the hook to save a failing financial company or to cover the cost of its liquidation.

·         Liquidation: Creates an orderly liquidation mechanism for FDIC to unwind failing systemically significant financial companies.  Shareholders and unsecured creditors bear losses and management will be removed. 

·         Liquidation Procedure: Requires that Treasury, FDIC and the Federal Reserve all agree to put a company into the orderly liquidation process, with an up front judicial review.

·         Costs to Financial Firms, Not taxpayers: Taxpayers will bear no cost for liquidating large, interconnected financial companies.  FDIC can borrow only the amount of funds to liquidate a company that it expects to be repaid from the assets of the company being liquidated.  The government will be first in line for repayment.  Funds not repaid from the sale of the company’s assets will be repaid first through the claw back of any payments to creditors that exceeded liquidation value and then assessments on large financial companies.

·         Bankruptcy: Most large financial companies are expected to be resolved through the bankruptcy process.

·         Regulator Mitigatory Action Required Before Systemic Dissolution to avoid potential adverse effects that the default of the financial company would have on low-income, minority or underserved communities. Base text does not require mitgatory action but allows the above considerations as part of the FDIC’s Orderly Liquidation Plan.

 

·         Oversight of Important Market Utilities: Identifies systemically important clearing, payments, and settlements systems to be regulated by the Federal Reserve.