Bank Reform Bill 2010

The current Bank Reform Bill began as financial regulation legislation in both the House and Senate. In December 2009, the House broadly passed a bill instituting sweeping changes in the financial regulatory system. The Senate passed a similar bill in May 2010, and as of mid-May 2010, both houses have attempted to reconcile the differences between the bills. Among some of the provisions of the bill are regulations or an outright ban against derivatives, the creation of a consumer protection agency, and more authority to the government to monitor a wide range of financial transactions.

Blanche Lincoln Amendment on Banning Derivatives

As the Senate began the debating the financial reform bill in May, Senator Blanche Lincoln decided to take an tough stance against banks regarding derivatives trading. Lincoln's amendment calls a separation between banks business serving the general public and their activities in credit derivative swaps. The amendment, which was voted on by the Senate and rolled into the larger Senate financial reform bill, "will force the biggest banks to spin off their swaps (or derivatives) desks into a separate entity. That entity will be regulated and can remain part of the bank holding company, but it no longer has access to the Federal Reserve's flow of funds, FDIC insurance and the taxpayer guarantee. Supporters include legendary economists and public policy experts such as Robert Reich, Joseph Stiglitz, Nouriel Roubini, and Michael Greenberger." The derivatives measure in the bill will target the five largest banks that account for 90% of the these derivative measures. " Lincoln's amendment will go right after the deals that Goldman Sachs is now being officially investigated for and Lincoln's language is #1 on their hit list." The bill provision requires banks to give up the lucrative business of derivative swaps in exchange for a guarantee of future support from the government.

Opposition to Lincoln's amendment

Leading the fight against the derivative ban provision, the five major banks involved in a majority of the derivative trading have organized a fight resisting this provision. "The nation’s five largest banks, which dominate the derivatives business, have dispatched trade groups, paid lobbyists and their own executives to convince senators that excluding banks from the derivatives business would make markets less safe by shifting the trading to foreign banks and other institutions that are subject to less federal oversight." The banks have spent $6.1 million already in opposing this derivative trading ban provision. More importantly, President Obama's administration has called the derivative provision as not adding any benefit to the financial reform bill. This reaction from the White House is surprising as President Obama originally called for strong regulations against derivatives. In fact, President Obama vowed to veto the bill if it did not contain strong restrictions against derivatives. Top financial regulators also find the derivative provision unnecessary. "The chairman of the Federal Reserve opposes it. The country’s chief banking regulator dislikes it. The secretary of the Treasury has been unsupportive, at best, and Paul A. Volcker — no one’s idea of a best friend to Wall Street — calls it unnecessary."

Final Version of Finance Bill

After much deliberation between the House and Senate in reconciling differences between two versions of the financial bill, the two committees came to an agreement regarding one final unified version of the financial bill. This new version will now be up for a vote in front of both the full House and Senate. Several of the provisions in the final version have been scaled back from the original language of the Senate bill. For example, Lincoln's derivatives' provision was watered down, requiring banks to only spin off certain swap desks. Essentially, the banks would be "required to spin off only their riskiest derivatives trading operations into affiliates. 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." The problem with the new derivative provision is that interest-rate and foreign-exchange swaps make up a majority of the derivative business, and banks are not required to spin off these swaps to their affiliates.

Other provisions revised include the Volcker Rule. The bill specifically "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."

Additionally, the bill creates several oversight provisions. First, the bill has a financial stability council, which has been given the responsibility to monitor and address overall system-wide risks to the country's financial stability. In extreme situations, the council has the power to break up financial firms. Second, the bill would create a consumer financial protection bureau, "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."

Articles and Resources

External Resources

• Mary Bottari, "Bank Reform Bait and Switch,", Huffington Post, June 6, 2010.

• Ruth Mantell and Donald Orol, "Consumers Win Protections in Bank-Reform Bill,", Market Watch, May 21, 2010.

• Blake Farmer, "Corker Says Financial Regulation Bill Hurts Banks and Business,", Nashville Public Radio, June 11, 2010.

• "Important Players in Financial Regulation Bill Discussion,", Wall Street Journal, June 10, 2010.

• David Cho and Bradly Dennis, "Senate Panel Passes Sweeping Financial-Regulation Bill,", Washington Post, March 23, 2010.

• "Factsheet: Senate Financial Regulation Bill,", Wall Street Journal, March 15, 2010.