Highlights of the House-Senate compromise bill on overhauling regulations on banks and other financial institutions.
A 10-member Financial Services Oversight Council made up of the treasury secretary, Federal Reserve chairman, a presidential appointee with insurance expertise, heads of regulatory agencies and a new consumer protection bureau would monitor financial markets and watch for threats. The council would have wide powers to determine which financial institutions must meet tougher regulations and would have a say in some new consumer financial protection regulations. It also would have the power to break up large financial firms if they pose a grave threat.
A Consumer Financial Protection Bureau within the Federal Reserve would police lending, taking powers now exercised by various bank regulators. Auto dealers would be exempt from the bureau’s rules. Regulators could appeal bureau regulations to the oversight council if they believe they would threaten the banking system. The council could veto the regulations with a two-thirds vote. Federal regulators could override state consumer laws on a case-by-case basis. Currently states have a more difficult time applying their laws to national banks.
The Federal Reserve would retain supervision over bank-holding companies and state-charted banks. It also would police large, interconnected nonbank institutions that the oversight council determines could pose a threat to the economy. With council approval, the Fed could break up large, complex companies that pose a grave threat to the financial system. The Government Accountability Office, Congress’ investigative arm, would be able to audit the Fed’s emergency lending to financial institutions in the months surrounding the 2008 financial crisis. It also could audit low-cost loans the Fed provides to banks, and the purchase and sale of securities that the Fed undertakes to set monetary policy.
Banks with more than $250 billion in assets would have to have reserves to protect against losses that are at least as strict as those that apply to smaller banks. Certain hybrid securities would no longer be considered as Tier 1 capital, the top standard for gauging a bank’s strength. Banks under $15 billion in assets would be able to retain those trust preferred securities that they already have in their reserves. Larger banks would have to phase those securities out in five years.
With few exceptions, trade in derivatives, the complicated financial instruments used to hedge against market fluctuations, would have to occur on regulated exchanges. Banks can still trade derivatives related to interest rates, foreign exchanges, gold and silver, a lucrative business for them. But bank holding companies would have use subsidiaries utilizing their own, non-bank source of funds to trade in riskier derivatives, including mortgage credit default swaps blamed for accelerating the financial crisis of two years ago. Any federal assistance to banks to prevent losses that result from derivatives trading would be prohibited.
Bank holding companies that have commercial banking operations would not be permitted to trade in speculative investments. However, bank holding companies will be allowed to invest up to 3 percent of their capital in private equity and hedge funds.
Shareholders would have the right to cast nonbinding votes on executive pay packages. The Fed would set standards on excessive compensation that would be deemed an unsafe and unsound practice for the bank.
Ratings agencies would have to register with the Securities and Exchange Commission and would face increased liability standards. The Securities and Exchange Commission would have to conduct a study to determine whether to change the long-standing practice where banks select and pay ratings agencies to rate their new offerings. The SEC would have to consider whether an independent board should select ratings agencies to assess the risks of new financial products.
Lenders would be required to obtain proof from borrowers that they can pay for their mortgages. They would have to provide evidence of their income, either though tax returns, payroll receipts or bank documents. That provision seeks to eliminate so-called stated-income loans where borrowers offered no proof of their ability to make mortgage payments. Lenders would have to disclose the maximum amount that borrowers could pay on adjustable-rate mortgages. Mortgage lenders are barred from receiving incentives to push people into high-priced loans.