October 2, 2010 / 4:43 AM / 9 years ago

Risk council takes first steps on Dodd-Frank

WASHINGTON (Reuters) - A new council of U.S. regulators charged with identifying risks to the financial system acted on Friday to begin implementing the new financial regulatory overhaul law.

Treasury Secretary Timothy Geithner looks on during the G20 Finance Ministers and Central Bank Governors Meeting in Busan, South Korea June 5, 2010. REUTERS/Andy Wong/Pool

The Financial Stability Oversight Council held its first meeting and voted to seek public comment for a period of 30 days on the Volcker rule, which restricts risky bank trading.

The panel also sought comments on what criteria should be used to decide which large non-bank financial companies should be supervised by the Federal Reserve.

Both votes were unanimous.

The recently enacted Dodd-Frank financial law tasks the panel with identifying threats to markets before they spread, in order to prevent a repeat of the 2007-2009 financial crisis.

The council is headed by Treasury Secretary Timothy Geithner, joined by top officials from the Fed, Securities and Exchange Commission, the Commodity Futures Trading Commission and the Federal Deposit Insurance Corp.

“We’re going to try very hard to make sure that these rules, this huge complicated burden of rule writing... is done carefully and quickly,” Geithner told the meeting.

Participants gathered around a u-shaped table in Treasury’s Cash Room, with Geithner at the head flanked by Fed Chairman Ben Bernanke on his right and FDIC Chairman Sheila Bair on his left.

The panel met privately ahead of the public portion of their meeting, which lasted about 20 minutes and contained little discussion about the issues.

The council has 10 voting members but there are currently two vacancies: the head of Consumer Financial Protection Bureau and an insurance expert. Both need to be appointed by the president and confirmed by the U.S. Senate.

It remains to be seen how well panel members will work together and to what degree bureaucratic and political rivalries will undermine its effectiveness.

There was a cooperative tone in agency leaders’ public comments on Friday, and CFTC Chairman Gary Gensler drew a chuckle when he reminded Geithner he could not end the meeting without a vote.

Financial industry officials are warily following the council’s work, which is expected to lead to tighter supervision of their business practices.

“Anybody who works in the financial industry understands that decisions made will be against their agenda nine times out of ten,” said Matt McCormick, a banking analyst and portfolio manager at Bahl & Gaynor.

“The only thing that is debatable is how they hit them — will it be with a club or will it be with a scalpel?” he said.

Mike Holland, president of money manager Holland & Co in New York, said he feared that the council would be the latest government body to make up its rules as it goes along.

“What comes out of this causes trepidation for anyone who’s ox can be gored as a result,” Holland said.

The Volcker rule restricts banks from trading with their own money, known as proprietary trading, and only allows them to invest up to 3 percent of their Tier 1 capital in hedge funds and private equity funds.

The council has until mid-January to study the rule before making recommendations on how it should be implemented. Regulations are due nine months after the study is completed and they will go into effect about a year later.

Banks aren’t waiting for this process to play out. Earlier this week, Reuters reported that Bank of America Corp is cutting about 20 to 30 employees from its proprietary trading staff as part of its effort to comply with the law.

Non-bank financial institutions that the council designates for supervision by the Fed would be subject to the government’s new powers to seize and liquidate failing financial giants to prevent chaos in the financial system.

The panel hopes to issue a proposed rule for comment on the criteria and process for designating non-bank firms by the end of the year, allowing a vote on a final proposal by the end of March.

Reporting by Dave Clarke, Additional reporting by Steve Eder, Editing by Tim Dobbyn

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