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Congress Approves US Financial Reform Bill, by Glen Shapiro, LawAndTax-News.com

Source: Glen Shapiro, LawAndTax-News.com

After a period of delay since its approval by the House of Representatives on June 30, the US financial reform bill was finally approved by the Senate on June 15 and sent to President Obama’s desk to be signed into law.

A committee from both the House of Representatives and the Senate had finalized the terms of the bill before the end of last month, prior to its re-presentation to both sides of Congress for their final approval. It had been hoped that the bill could be approved and sent to President Obama by July 4, but an appropriate amount of time has had to be allowed for review by those Republican senators whose support was necessary for its passage.

In the event, the only major change in the bill during its final review stage has been the removal of a USD19bn levy on the larger banks to fund the cost of the reforms. However, those institutions will still meet part of those costs through increased premium rates paid to the Federal Deposit Insurance Corporation to insure bank deposits.

The bill makes considerable and widespread changes to the regulation of the US financial system. Apart from the section of the bill providing increased consumer financial protection, the bill provides for the orderly dissolution of failing firms, ending “too big to fail”, and tough restrictions are to be imposed on government assistance to banks in times of crisis, so as to eliminate bailouts.

It will create a new body to monitor the market to identify potential threats to the stability of the financial system. Financial firms judged as posing a threat to financial stability will be subject to much stricter standards and regulation, including higher capital requirements, leverage limits, and limits on concentrations of risk. The bill also fills a hole that allows hedge funds and their advisers to escape regulation.

Banks will be required to retain a portion of the risk they generate, in order to provide market discipline for underwriting decisions, and there will be, for the first time, a comprehensive system of regulation of the over-the-counter derivatives market. Restrictions will be placed on the banks’ ability to trade derivatives and to take risks by trading on their own account.

In addition, all larger financial institutions will be required to disclose remuneration arrangements that include any incentive based elements. Federal regulators would be authorized to ban inappropriate or imprudently risky compensation practices.

After the bill’s approval by the Senate, the Treasury Secretary, Timothy Geithner, said that the bill is a “tough overhaul” of the US financial system. He added that “the message of this bill is clear: banks – not the taxpayers – will pay for future bank failures and consumers will be protected.”

On hearing of the bill’s passage, President Obama also called it an “end to bailouts, a beginning for accountability”. First and foremost, he said that, “because of this reform, the American people will never again be asked to foot the bill for Wall Street’s mistakes.”

“There will be no more taxpayer-funded bailouts – period,” he continued. “If a large financial institution should ever fail, this reform gives us the ability to wind it down without endangering the broader economy. And there will be new rules to end the perception that any firm is ‘too big to fail’, so that we don’t have another Lehman Brothers or AIG.”

However, all parties also agree that the bill is only a beginning, and that it will take a considerable amount of work to put the financial reforms into effect. According to Geithner: “As soon as the President signs this bill into law, we will move forward to design and implement these new protections and to consolidate responsibility and authority.”

This was also recognized by the Commodity Futures Trading Commission (CFTC) chairman, Gary Gensler, whose view was that: “Even after the President signs the Wall Street reform bill, financial reform will be far from complete. The Securities and Exchange Commission, the Federal Reserve, the Federal Deposit Insurance Corporation, the Treasury Department and the CFTC, among others, will have a significant number of rules to write and implement to regulate the financial system.”

As the bill requires strong regulation of over-the-counter derivatives dealers for the first time, Gensler confirmed that, for example: “Just at the CFTC, we have organized around 30 areas where we believe rules will be necessary. Some of these areas will require only one rule, while others may require more. We will be required to complete these rules generally in 360 days, though we will be required to complete some of them in 90, 180 or 270 days.”

Geithner is also aware of the bill’s international implications, particularly with regard to the on-going discussions on financial regulation in the G20. “Recognizing that financial markets are truly global,” he confirmed that the US “will work hard to bring the rest of the world along with us as we raise the standards of financial protection in the US and reinforce the competitiveness of our country’s most innovative firms.”

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