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Financials

FACTBOX-Major U.S. financial regulation reform proposals

April 26 (Reuters) - The U.S. Senate was expected to cast a key test vote on Monday on legislation, proposed by Democrats and backed by President Barack Obama, to tighten the regulatory screws on banks and markets after the financial crisis.

The bill was seen as likely to fail the test vote, then to come back later, possibly within days, in a modified bipartisan version that analysts said probably will win final passage.

If approved, it would have to be merged with a bill backed by the House of Representatives in December. Then a final version could be sent to Obama, who would sign it into law.

Here are snapshots of the major elements of the bill:

PREVENTING MORE BAILOUTS

* Objective: Squash the idea that some financial firms are "too big to fail." Prevent future bailouts like AIG's AIG.N.

But also prevent disaster that can come from refusing to bail out troubled firms, as the Bush administration did in 2008 with Lehman Brothers. Its collapse froze markets worldwide.

Seeking a middle ground between bailout and bankruptcy, the Senate bill sets up an “orderly liquidation” process for large firms in distress. Authorities could seize and dismantle them.

The bill creates a $50 billion fund to pay for such actions. Firms with assets over $50 billion would pay into it.

Republicans object. The fund could borrow from the Treasury if it ran short of money. “Backdoor bailout,” Republicans say.

* House-Senate dynamic: The House bill, like the Senate’s, has a new liquidation process, but it is simpler and bigger.

The House wants a $200 billion fund. Firms with assets over $50 billion would pay $150 billion into it. The fund could borrow another $50 billion from the Treasury if needed.

* Winners and losers: If the new strategy works, the economy is better protected from financial sector crises. Big financial firms are likely to take a hit from paying fees.

Some Republicans want to kill the liquidation fund idea entirely. But “orderly liquidation” needs financing. There is wide, bipartisan support for a new process. Someone will have to pay for it. With congressional elections set for November, it probably will not be taxpayers.

PROTECTING CONSUMERS

* Objective: Stop abusive home mortgages, credit cards.

The Senate bill creates a financial consumer protection bureau inside the Federal Reserve to regulate such products.

Obama and many Democrats want more, namely a watchdog that is an independent agency with more power than a Fed unit.

House-Senate dynamic: The House bill calls for an independent agency, while the Senate bill puts it in the Fed to appease Republicans.

The House bill exempts many businesses from the watchdog’s oversight. The Senate bill has fewer outright exemptions.

Winners and losers: Consumers can expect stronger protections. Credit card firms and mortgage lenders face a tougher regulatory regime, regardless of where the watchdog is set up.

VOLCKER RULE

* Objective: Ban risky trading, unrelated to customers’ needs, at banks with a cost-of-capital edge conferred by their being backed by taxpayers, either directly or otherwise.

Obama proposed this ban on “proprietary trading” in January along with his adviser, former Fed chairman Paul Volcker. It may become law but probably not as written.

“Volcker rule” provisions are in the Senate bill but it leaves the door open to regulators watering it down later.

* House-Senate dynamic: Volcker rule is not in House bill.

* Winners and losers: Too soon to say. Volcker says enacting the rule would avert the next financial crisis. Large firms could lose profits if the rule is enacted. But the Senate bill, as written, falls well short of making that a certainty.

OVER-THE-COUNTER DERIVATIVES

* Objective: Police the $450 trillion over-the-counter derivatives market. A hothouse for risk during boom years, it greatly amplified the financial crisis.

The Senate bill proposes new rules along lines sought by Obama. He wants to push as much OTC derivatives traffic as possible through exchanges, electronic platforms and clearing houses, boosting transparency, risk comprehension and price competition. A harder-hitting proposal from the Senate Agriculture Committee is also expected to be added to the bill. It would require banks to spin off swap-trading units.

* House-Senate dynamic: The two bills are similar but the House exempts a wide range of end users from central clearing.

* Winners and losers. Wall Street mega-firms -- Goldman Sachs GS.N, JPMorgan Chase JPM.N, Citi C.N, Bank of America BAC.N and Morgan Stanley MS.N -- dominate the market. The fat profits they reap from it would be reduced.

SYSTEMIC RISK

* Objective: Create a new entity to spot and head off the next crisis. The Senate bill sets up a nine-member council of regulators, chaired by the Treasury secretary.

* House-Senate dynamic: The House bill proposes a council chaired by the Treasury but gives the Fed a bigger role.

* Winners and losers: Big banks and financial firms would be forced into a tighter regulatory straitjacket.

POLICING BANKS

* Objective: Rationalize the jigsaw-puzzle bank supervision system to stop problems from festering in the cracks.

The Senate bill keeps oversight of large bank holding companies with assets over $50 billion at the Fed, but it would lose power over state banks with under $50 billion in assets.

Those would shift to the Federal Deposit Insurance Corp, which would be in charge of all state banks and thrifts, as well as holding companies of state banks under $50 billion.

National banks with assets below $50 billion would be under the Office of the Comptroller of the Currency, which would also absorb the Office of Thrift Supervision, which would close.

* House-Senate dynamic: Big differences -- the House bill preserves the Fed’s and FDIC’s bank supervision roles.

* Winners and losers: OTS will close -- both the House and Senate bills call for that. Otherwise, banks would lose the ability to shop around for the weakest regulator.

EXECUTIVE PAY AND SHAREHOLDER RIGHTS

* Objective: Give shareholders more say on executive pay and more clout in electing directors.

* House-Senate dynamic: Both bills back these ideas. The House is less forceful on director nominations.

* Winners and losers: Corporate managers could lose their stranglehold on the director nomination process. Shareholders could gain more say on pay but it would largely be symbolic.

REGULATING HEDGE FUNDS

* Objective: Hedge funds must register with the government, opening their books to more scrutiny, but the Senate bill exempts venture capital funds and private equity funds.

* House-Senate dynamic: The House bill calls for registration of hedge funds worth $150 million or more. The Senate’s cut-off level is $100 million. The House bill exempts venture capital funds from full registration, while requiring offshore funds to register. The Senate bill does not do this.

* Winners and losers: Regulators would gain a window into a murky market. An estimated 55 percent of hedge funds are already registered. Those that are not would have to do so.

FIXING SECURITIZATION

* Objective: Make the securitization market more transparent and accountable. The Senate bill forces securitizers to keep baseline 5 percent of credit risk on securitized assets.

* House-Senate dynamic: The bills are similar.

* Winners and losers: Investors in securitized products would be better protected. Securitizers -- from lenders to Wall Street bundlers -- face stricter oversight.

CRACKING DOWN ON CREDIT RATING AGENCIES

* Objective: Boost the Securities and Exchange Commission’s power over credit rating agencies. The Senate bill also reduces instances in the law that mandate use of unneeded ratings and exposes raters to more legal risk.

* House-Senate dynamic: The bills are similar.

Winners and losers: Major rating agencies -- Moody's Corp MCO.N, Standard & Poor's MHP.N, Fitch Ratings LBCP.PA -- face stricter oversight but their business models survive. (Reporting by Kevin Drawbaugh; Editing by Andrew Hay)

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