[Infowarrior] - What's in Financial Reform Bill?

[Richard Forno]

What's in Financial Reform Bill? Most Americans Don't Know

Reuters

| 15 Jul 2010 | 03:07 PM ET

http://www.cnbc.com/id/38262799

The broadest overhaul of US financial rules since the Great Depression won final approval in the Senate on Thursday. Yet over 70% of Americans know nothing about the legislation.

< --- >

Now that the bill is set to become law, here's a rundown of the key elements:

TITLE I. Systemic Risk

A council of regulators chaired by the secretary of the Treasury would be created to monitor big-picture risks in the  financial system. The Financial Stability Oversight Council could identify firms that threaten stability and subject them to tighter oversight by the Federal Reserve. The Fed and the council could break up firms that have not responded to earlier measures and pose an urgent threat.

TITLE II. Ending Bailouts

The bill would set up an "orderly liquidation" process that the government could use in emergencies, instead of bankruptcy or bailouts, to dismantle firms on the verge of collapse.

The goal is to end the idea that some firms are "too big to fail" and avoid a repeat of 2008, when the Bush administration bailed out AIG and other firms but not Lehman Brothers. Lehman's subsequent bankruptcy froze capital markets.

Under the new rule, firms would have to have "funeral plans" that describe how they could be shut down quickly.

The Federal Deposit Insurance costs for running liquidations would be covered in the short term by a Treasury credit line, then recouped by sales of the liquidated firms' assets. In case of shortfalls, costs could be further covered by claw-backs of any payments to creditors that exceeded liquidation value, and fees charged to other large firms.

The FDIC could guarantee the debts of solvent insured banks to prevent bank runs. But this could only happen if the boards of the FDIC and the Fed decided financial stability was threatened, Treasury approved the terms, and the president activated a rapid process for congressional approval.

TITLE III. Supervising Banks

The U.S. Office of Thrift Supervision, which was widely criticized in the run-up to the 2007-2009 credit crisis, would be closed and most of its duties shifted to the Comptroller of the Currency.

Banks would be barred from converting their charters to escape regulatory enforcement actions.

The FDIC's deposit insurance coverage would be permanently raised to $250,000 per individual from $100,000.

TITLE IV. Hedge Funds

Private equity and hedge funds with assets of $150 million or more would have to register with the Securities and Exchange Commission, exposing them to more scrutiny. Venture capital funds would be exempted from full registration.

Investment advisers would have to manage assets of $100 million or more to be federally regulated, an increase from the present $30 million level. The change would shift some of the oversight for small firms from the SEC to the states.

TITLE V. Insurance

A new federal office would be created to monitor, but not regulate, the insurance industry, which is now policed only at the state level. The move would appease opponents of centralized regulation by keeping real power out of Washington's hands, while giving big insurers that want a single regulator a foothold they might be able to expand from in the future.

TITLE VI. Volcker Rule And Bank Standards

Under a rule proposed by White House economic adviser Paul Volcker, the bill would bar proprietary trading unrelated to customers' needs at banks that enjoy government backing, with some of the details of implementation left up to regulators.

Banks could continue to invest up to 3 percent of their Tier 1 capital in private equity and hedge funds, not to exceed 3 percent of any single fund's total ownership interest.

Private equity and hedge fund interests above the new caps would have to be divested over time, under the Volcker rule.

In addition, the largest banks' ability to expand would be limited by a new cap on share of industry-wide liabilities.

Non-bank financial firms supervised by the Fed would face limits on proprietary trading and fund investing as well.

Bank holding companies within five years would have to stop counting trust-preferred securities and other hybrids as Tier 1 capital, a key measure of a bank's balance sheet strength.

Firms with assets under $15 billion could count current holdings of hybrids as Tier 1 capital, but not any new ones.

The bill would also require credit exposure from derivative transactions to be added to banks' lending limits.

In addition, bank capital standards could not sink below those already on the books, and a 15-to-1 leverage standard could be imposed on firms that threaten financial stability.

The bill would also make bank holding companies follow higher capital standards observed by bank subsidiaries.

Analysts expect the Volcker rule and related changes to cut profit at firms such as Bank of America, Goldman Sachs, Morgan Stanley and JPMorgan Chase.

TITLE VII. Over-The-Counter Derivatives

The bill would impose regulation for the first time on the $615 trillion over-the-counter derivatives market, including credit default swaps like those that dragged down AIG.

Much OTC derivatives traffic would be rerouted through more accountable and transparent channels such as exchanges, electronic trading platforms and central clearinghouses.

Banks would also have to spin off the riskiest of their swap-clearing desk operations, but could keep many swaps in-house, including derivatives to hedge their own risks.

Some end-users of OTC derivatives would be exempted from central clearing requirements. Swap-dealers' ownership interests in clearinghouses would be limited.

JPMorgan, Bank of America and other commercial banks could face structural changes from the bill, while it could boost business for clearing and trading venues such as CME and IntercontinentalExchange, analysts said.

TITLE VIII. Payment, Clearing And Settlement

Supervision of firms that settle payments among financial institutions would be broadened.

TITLE IX. Protecting Investors

On brokers and how they interact with investors, the SEC, after a study, could order brokers who give investing advice to follow a higher standard of client care.

On credit rating agencies, a new SEC office to regulate the agencies would be created. The SEC would have two years to study the widely criticized industry. Afterward, unless it comes up with a better idea, the agency would have to implement a plan to form a government panel to assign agencies to debt issuers for initial ratings of new structured securities.

Rating agencies would also be exposed to more legal risk.

On debt securitization, lenders that make loans and then sell them off as securities would have to retain at least 5 percent of the loans' risk on their books, unless the loans meet certain standards for reducing risk.

The SEC's enforcement powers would be beefed up and its funding levels raised.

On executive pay, shareholders periodically could cast non-binding votes on top managers' compensation packages, while their role in electing directors would also be enhanced.

Corporations would have to allow claw-backs of executive pay if it was based on inaccurate financial information.

TITLE X. Protecting Consumers

A new government watchdog would be established to regulate mortgages, credit cards and other consumer financial products.

The Consumer Financial Protection Bureau would be a separate unit within the Fed and funded by the central bank. It would consolidate consumer programs now dispersed across several agencies. Its director would be nominated by the president and confirmed by the Senate.

The CFPB would answer, in some instances, to the Financial Stability Oversight Council. Car dealers, who fought for and won an exemption, would be beyond the watchdog's reach. Fees charged on debit-card transactions would be limited.

TITLE XI. Federal Reserve

The Fed's emergency lending would be exposed to congressional scrutiny, but not its decisions on interest rates. New limits would be placed on the Fed's so-called 13(3) emergency lending authority

TITLE XII. Financial Access

Programs would be supported to help people without bank accounts to open them and to improve access to small loans and enhance financial literacy.

TITLE XIII. Funding

The costs of the reform bill would be met by funds raised from shutting down the $700 billion Troubled Asset Relief Program, and increasing the amounts of money that banks must pay to insure their deposits.

An earlier funding plan that targeted a new tax at large Wall Street banks and financial firms was dropped after some Senate Republicans complained about it.

TITLE XIV. Mortgage Reform

Mortgage lenders would have to assess borrowers' ability to repay before making a loan. Pre-payment penalties against borrowers and bonuses to lenders known as "yield spread premiums" would be barred, with violators facing penalties.

Other new protections would be set up for borrowers aimed at ending predatory and abusive mortgage lending practices.

Copyright 2010 Reuters. Click for restrictions.
URL: http://www.cnbc.com/id/38262799/