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US financial stability bill divides opinion

Wednesday 9 June 2010 - by John Rowland

The US Senate passed the Financial Stability Bill on May 21, bringing sweeping reform of banking regulation within touching distance of the statute books.

The Bill, which proposes reforms aimed at preventing a repeat of the failures seen during the financial crisis, was hailed by its sponsor, Senate Banking Committee Chairman Chris Dodd, as a “a major step towards creating a sound economic foundation for the American people.”

Measures include the establishment of a new independent Consumer Financial Protection Bureau, transparency requirements for traders in derivatives, a new council charged with overseeing risks to the financial system and the introduction of a resolution and recovery regime that will see failed banks liquidated rather than bailed-out.

But industry representatives oppose several aspects of the Bill. Securities Industry and Financial Markets Association President Tim Ryan says: “There are several provisions in the current legislation that would undermine the original goals for reform by creating unintended consequences”.

Particular concerns have been raised about the so-called Volcker Rule which will curtail banks’ ability to trade on their own account and wider reforms to the trading of derivatives which SIFMA believes will harm the banks’ ability to hedge risks and will increase the cost of capital.


Concern has also been expressed by some lawmakers including the ranking Republican on the Banking Committee, Sen Richard Shelby who said that he could not vote for a “flawed” Bill. In his closing statement he argued that the Bill would increase the size and intrusiveness of government without addressing many of the key causes of the last crisis. He said the Bill was “a series of deals made, not by lobbyists, but by the executive branch along with the existing financial regulators who failed to do their jobs during the last crisis”.

Negotiations are now set to place to reconcile the different texts passed by the House and Senate where some of the more contentious measures could be watered down.

House Financial Services Committee Chairman Barney Frank, who pushed the Bill through the lower chamber, is optimistic that a deal can be done quickly: “The two bills are very similar, and the House is ready to go to conference to work out the remaining issues. I am confident that we can have a bill ready for President Obama’s signature very soon”.


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