Major Provisions in the Financial Overhaul BillWASHINGTON -- The sweeping financial overhaul legislation negotiators wrapped up early Friday morning would constitute the biggest overhaul of U.S. financial regulations since the 1930s. The legislation, broadly, is designed to close the regulatory gaps and end the speculative trading practices that contributed to the 2008 financial market crisis. Major components of the bill include:
NEW REGULATORY AUTHORITY: Gives federal regulators new authority to seize and break up large troubled financial firms without taxpayer bailouts in cases where the firm's collapse could destabilize the financial system. Sets up a liquidation procedure run by the FDIC. Treasury would supply funds to cover the up-front costs of winding down the failed firm, but the government would have to put a "repayment plan" in place. Regulators would recoup any losses incurred from the wind-down afterwards by assessing fees on financial firms with more than $50 billion in assets.
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VOLCKER RULE: Would curb propriety trading by the largest financial firms, though banks could make de minimus investments in hedge and private-equity funds. Those investments would be limited to 3% or less of a bank's Tier 1 capital. Banks would be prohibited from bailing out a fund in which they are invested.
DERIVATIVES: Would for the first time extend comprehensive regulation to the over-the-counter derivatives market, including the trading of the products and the companies that sell them. Would require many routine derivatives to be traded on exchanges and routed through clearinghouses. Customized swaps could still be traded over-the-counter, but they would have to be reported to central repositories so regulators could get a broader picture of what's going on in the market. Would impose new capital, margin, reporting, record-keeping and business conduct rules on firms that deal in derivatives.
SWAPS SPIN-OFF: Would require banks to spin off only their riskiest derivatives trading operations into affiliates, in a late-night compromise struck to scale back a controversial provision championed by Sen. Blanche Lincoln (D., Ark.). Banks would be able to retain operations for interest-rate swaps, foreign-exchange swaps, and gold and silver swaps among others. Firms would be required to push trading in agriculture, uncleared commodities, most metals, and energy swaps to their affiliates.
CONSUMER AGENCY: Would create a new Consumer Financial Protection Bureau within the Federal Reserve, with rulemaking and some enforcement power over banks and non-banks that offer consumer financial products or services such as credit cards, mortgages and other loans. The new watchdog would have authority to examine and enforce regulations for all mortgage-related businesses; banks and credit unions with assets of more than $10 billion in assets; pay day lenders, check cashers and certain other non-bank financial firms. Auto dealers won a hard-fought exemption from the Bureau's reach.
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Updated to add:
Financial Reform Bill Looks Like Game-ChangerBut, overall, the Restoring American Financial Stability Act of 2010 is much harder on big banks than anyone had suspected at the start.
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Among the more surprising wins for the anti-Wall Street crowd was passage of the Volcker rule. Named after former Fed chief Paul Volcker, the provision will effectively reinstate the Glass-Steagall Act enacted after the Great Depression -- something that seemed unthinkable just a few months ago.
The provision will disallow big banks from proprietary trading, or making bets with deposits and other liquid assets for their own profit. As a concession, banks will be allowed to own small stakes in hedge funds and private equity shops, since they can't make such investments on their own.
Another controversial measure regarding derivatives went through as well. The new rule, authored by Sen. Blanche Lincoln, will force banks to house riskier derivatives trading in new, freshly capitalized entities, or simply spin them off.
As a result, there will be no more trading of commodity derivatives or the highly complex vehicles that nearly brought down the financial system at any of the top Wall Street firms. This should have a huge impact on the five big banks that handle 97% of derivatives trading in the United States: JPMorgan Chase(JPM), Citigroup(C), Bank of America(BAC), Goldman Sachs(GS) and Morgan Stanley(MS).
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