Friday, June 25, 2010

Financial regulation reform deal reached in the U.S.

The NYT is reporting that the Senate and House have reached agreement on financial regulation reform:
A 20-hour marathon by members of a House-Senate conference committee to complete work on toughened financial regulations culminated at 5:39 a.m. Friday in agreements on the two most contentious portions of the financial regulatory overhaul and a host of other provisions.
The agreements were reached after hours of negotiations, most of it behind closed doors and outside the public forum of the conference committee discussions. The approvals cleared the way for both houses of Congress to vote on the full financial regulatory bill next week.

The bill has been the subject of furious and expensive lobbying efforts by businesses and financial trade groups in recent months. While those efforts produced some specific exceptions to new regulations, by and large the bill’s financial regulations not only remained strong but in some cases gained strength as public outrage grew at the excesses that fueled the financial meltdown of 2008.

Interestingly, despite the efforts of lobbyists, the Volcker rule seems to have survived:
The rule, named for Paul Volcker, the former Federal Reserve chairman who proposed the measure earlier this year, restricts the ability of banks whose deposits are federally insured from trading for their own benefit. That measure had been fiercely opposed by banks and large Wall Street firms, who viewed it as a major incursion on some of their most profitable activities.

But the devil is in the details:
Banks managed to wrangle limited exceptions to the rule that would allow them to continue some investing and trading activity. The agreement limits banks’ investments in hedge funds or private equity funds to no more than 3 percent of a fund’s capital; those investments could also total no more than 3 percent of a bank’s tangible equity.

Other key provisions:
  • Securities and Exchange Commission to have authority to require stockbrokers to protect their clients’ interest when recommending investments, potentially subjecting brokers to the same fiduciary duty as financial advisers.

  • S.E.C. to complete a study within six months of the financial bill’s enactment to evaluate the effectiveness of current rules governing those who give financial advice to or sell securities to consumers.
The law is over 1500 pages long and certainly not cheap:
The Congressional Budget Office estimated that the financial regulatory bill would cost roughly $20 billion over 10 years. The conference committee agreed to pay for the bill by imposing an assessment on large financial institutions; the assessments would be made according to a “risk matrix” that charges higher amounts to riskier institutions.Mr. Frank said that the assessments — which Republicans called a tax — are an acceptable solution for “the collective errors of many in the financial institutions that caused this set of problems.”

Stay tuned for more on this topic in the coming weeks and months.