April 13, 2010 / 4:15 PM / 8 years ago

FACTBOX-Major U.S. financial regulation reform proposals

WASHINGTON, April 13 (Reuters) - The U.S. Congress is moving closer to a decision on legislation that would tighten the regulatory screws on banks and capital markets, potentially changing the financial services industry for decades to come.

A final Senate vote is expected within weeks. Approval of the Democratic bill is considered likely by analysts, although Republicans are still trying to water it down or kill it. It won committee approval last month in a party-line vote.

Democrats in the House of Representatives approved a bill in December, also without any Republican support. It would have to be merged with whatever the Senate produces before a final measure could go to President Barack Obama to be signed into law. Analysts say that could happen by mid-year.

Below are snapshots of the major reform proposals.

PREVENTING MORE BAILOUTS

* Objective: Lawmakers want to squash the idea that some financial firms are ‘too big to fail’ and avert anymore bailouts like AIG’s (AIG.N) and Citigroup’s (C.N).

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

Seeking a middle ground between bailout and bankruptcy, the Senate bill sets up a new process for “orderly liquidation” of large firms that get into trouble. Authorities could seize distressed firms and dismantle them. The Senate bill creates a $50 billion fund to finance such actions. Large firms with assets above $50 billion would pay into the fund.

Republicans object to a part of the bill that would let the fund borrow additional money from the Treasury -- that means taxpayers -- if the liquidation fund runs short. This provision smells like “backdoor bailouts,” say Republicans.

* House-Senate dynamic: The House bill, like the Senate‘s, sets up a new liquidation process, but it would be simpler to invoke and and it would come with a higher price-tag.

The House proposes a $200-billion fund. Firms with assets over $50 billion would pay up to $150 billion into the fund, which could borrow another $50 billion from the Treasury.

* Winners and losers: If the new strategy works, the economy will be better protected from damaging financial sector crises that have erupted regularly since the 1980s.

Large financial firms will almost certainly take a hit on this proposal by having to pay substantial fees.

Some Republicans -- working closely with Wall Street lobbyists to block and weaken reforms -- want to kill the liquidation fund idea entirely, but that looks unlikely.

There is wide, bipartisan support for a new process to prevent future AIG-style debacles. Someone will have to pay for it. With elections near, it probably won’t be taxpayers.

PROTECTING CONSUMERS

* Objective: Democrats want to put a stop to abusive home mortgages and deceptive credit cards.

The Senate bill creates a financial consumer protection bureau inside the Federal Reserve to regulate such products, which are now overseen inadequately by a several regulators.

Obama and many Democrats want the watchdog to be an independent agency, with more power than a Fed unit would have. The struggle over this proposal will play out in weeks ahead.

House-Senate dynamic: The House bill included the White House proposal for an independent agency. The Senate bill puts the watchdog in the Fed to appease anti-watchdog Republicans.

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

Winners and losers: If bill is enacted, consumers can expect stronger protections. Credit card firms, mortgage lenders and payday loan companies all face a tougher regulatory regime ahead, regardless of where the watchdog is situated.

VOLCKER RULE

* Objective: Obama wants to ban risky trading unrelated to customers’ needs at banks that enjoy a competitive edge in the market because they have some form of taxpayer support.

The president proposed a ban on such proprietary trading in January with adviser Paul Volcker, a former Federal Reserve Board chairman, at his side. The so-called “Volcker rule” may become law, but probably not as written.

Provisions embodying the Volcker rule are in the Senate bill, but it leaves the door open to regulators watering down or invalidating the rule later. Separate legislation in the Senate takes a tougher approach.

* House-Senate dynamic: The Volcker rule is not in the House bill, which was approved before Obama unveiled the rule.

* Winners and losers: Too soon to say. Volcker, a widely respected economic sage, says enacting his rule would help head off the next financial crisis. Large financial firms could lose a major profit center if the rule becomes law, but the Senate bill as written falls well short of making that a certainty.

OVER-THE-COUNTER DERIVATIVES

* Objective: The unpoliced, $450-trillion over-the-counter derivatives market was a hothouse for risk during the boom years that greatly amplified the crisis when it finally hit.

    The Senate bill would impose a new set of rules along the lines of those sought by Obama. He wants to force as much OTC derivatives traffic as possible through exchanges, equivalent electronic trading platforms and central clearinghouses.

    * House-Senate dynamic: The two bills are closely similar, although the House exempts a wider range of end users of financial contracts from mandatory central clearing. The issue is further complicated by the involvement of the House and Senate agriculture committees, which have their own bills.

    * Winners and losers. A handful of Wall Street mega-firms -- Goldman Sachs (GS.N), JPMorgan Chase (JPM.N), Citi, Bank of America and Morgan Stanley (MS.N) -- dominate the market. The substantial profits they reap from it could be reduced if more transparency and accountability impinged on their franchise.

    SYSTEMIC RISK

    * Objective: Lawmakers want some sort of new entity that can spot and head off the next crisis -- something that existing regulators have failed repeatedly to do.

    The Senate bill would set up a 9-member council of regulators, chaired by the Treasury Secretary.

    * House-Senate dynamic: The House bill proposes an inter-agency council chaired by the Treasury, as well, but gives the Fed a bigger role as chief policy agent.

    * Winners and losers: Big banks and financial firms would be forced into a tighter regulatory straitjacket than their mid-sized and small rivals under Congress’ proposals.

    POLICING BANKS

    * Objective: The jigsaw-puzzle of U.S. bank supervision system let problems fester in the cracks. But efforts to fix it have lost headway amid resistance from turf-protecting agencies and bank lobbyists keen to preserve the status quo.

    The Senate bill would let the Fed keep oversight of large bank holding companies with assets over $50 billion. That would cover about 44 major firms, including giants already under the Fed, such as Citigroup and Bank of America (BAC.N).

    The Fed would lose authority over state banks with less than $50 billion in assets, under the Senate bill.

    Those banks 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. The House bill preserved the Fed’s and the FDIC’s bank supervision roles intact.

    * Winners and losers. OTS will close. Both the House and Senate bills call for it. Aside from that, banks would lose the ability to shop around for the weakest regulator. (Reporting by Kevin Drawbaugh, Editing by W Simon )

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