On May 20, 2010, the United States Senate passed the most important regulatory reform of the financial system since the Banking Act of 1933. Here are some of the critical components of the legislation:

  • The bill explicitly prohibits future government bailouts of financial institutions and it requires that the financial industry be responsible for the cost of unwinding failing banks
  • Resolution Authority: According to Bloomberg, “the Senate bill would give the Federal Deposit Insurance Corp., which already has authority to liquidate failed commercial banks, power to unwind large failing financial firms whose collapse would roil the economy.”
  • Creation of a Consumer Financial Protection Agency at the Federal Reserve to protect consumers from abusive credit-card and mortgage lenders
  • Establishment of a Financial Stability Oversight Council to monitor major financial institutions so that the failure of one large bank does not pose a systemic risk to the entire financial system
  • U.S. banks are now banned from engaging in proprietary trading as well as from owning hedge funds and private-equity funds (The “Volcker rule,” named after the former Fed Chairman Paul Volcker)
  • Greater transparency in the $615 trillion derivatives market as most trades will now have to be conducted on regulated exchanges, where trades are made public, instead of the current over-the-counter system (In addition, banks with access to the Federal Reserve discount window would be required to spin off  their swaps trading operations)
  • Creation of a credit ratings board that would randomly assign ratings agencies for securities to reduce conflict of interest (Currently, banks are responsible for choosing and paying the agencies that rate their securities)
  • Hedge funds with $100 million or more in assets would be required to register with the Securities and Exchange Commission and those deemed too risky will be supervised by the Federal Reserve

Note that the Senate bill needs to be reconciled in conference with the version passed by the House last December.

Sources: Bloomberg, CNN

Abraham Tiamiyu