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Reforms on the Table

Summaries of the proposals from Congress and the Obama administration to prevent another financial crisis

Two New Agencies

The Obama administration wants to create two regulatory agencies: one to keep tabs on potential threats to the financial system -- such as the problems Brooksley Born flagged in the derivatives market in the late 1990s -- and one to protect consumers from abusive practices by the financial services industry. In Congress, both agencies have been the subject of intense scrutiny as regulators spar over who should have which powers and Wall Street lobbyists fight to protect profits.

Financial Services Oversight Council

A cross-agency observer and facilitator

The Financial Services Oversight Council will "facilitate coordination of financial regulatory policy and resolution of disputes and identify emerging risks in financial markets." The council will replace the President's Working Group on Financial Markets. It will report to Congress, and its members will include representatives from the eight principal federal financial regulatory agencies.

The debate: A useful risk monitor, or a toothless compromise?

Some critics believe the new agency will be all bark and no bite. Under the current administration proposal, the new council will monitor the financial system, but most of the expanded powers to deal with potential threats -- including monitoring "too big to fail" financial firms and overseeing the payment, clearing and settlement systems that create market transparency -- will be delegated directly to the Federal Reserve, not the council itself.

"The Oversight Council described in the administration's proposal currently lacks sufficient authority to effectively address systemic risks," said Sheila Bair, chairman of the Federal Deposit Insurance Corporation, at an open House hearing on the plan. In its current conception, some argue, the council is a weak compromise intended to placate those wary of imbuing the Federal Reserve with more power.

Those who support the proposal argue that the Federal Reserve has experience in market oversight and that its new responsibilities are a logical extension of its current role. Transferring these powers to a new agency would be complicated and time-consuming and could lead to a greater disruption of the market. "For purposes of both effectiveness and accountability, the consolidated supervision of an individual firm, whether or not it is systemically important, is best vested with a single agency," Federal Reserve Chairman Ben Bernanke testified in front of the House Financial Services Committee.

Supporters also argue that a council bringing together a melting pot of financial regulators is best suited to maintaining big-picture supervisory responsibilities rather than acting as a responsive regulator. "You don't convene a committee to put out a fire," Treasury Secretary Timothy Geithner stated at a Senate hearing.

Consumer Financial Protection Agency

A consolidated regulatory hub to protect consumers

The Consumer Financial Protection Agency (CFPA), as envisioned by the administration, will have wide-reaching power to regulate not only banks and mortgage companies but also financial services previously outside the purview of federal regulation, such as payday loans, personal investment services, credit reporting agencies and stored-value cards.

It would have the power to levy substantial fines -- up to $10,000 per day for some offenses -- and to prosecute financial services providers who break the rules the CFPA creates. The CFPA would be tasked with writing disclosures in standard, clear language that make financial transactions, such as mortgages, easier to understand. The creation of the CFPA will consolidate regulatory powers currently spread among several agencies.

The debate: Is it a stifling behemoth or a necessary bulwark?

While banks and mortgage brokers have generally admitted the need for some reform in light of the current financial crisis, the financial services industry is strongly opposing the creation of the CFPA as proposed by the Obama administration. Industry representatives argue that unlike the current system, in which bank regulators charged with consumer protection are also responsible for monitoring banks' financial soundness, the new agency will lack an understanding for the business side of the industry. This disconnect, they argue, will create unnecessary hurdles for lenders and, according to Mortgage Bankers' Association President John Courson, will "stem innovation." (PDF) They also argue a new agency will mean new layers of bureaucracy and intimidating levels of liability.

Federal Reserve Chairman Ben Bernanke also opposes the creation of the CFPA. He believes its responsibilities would be better managed by his agency. He testified before the House Financial Services Committee: "The Federal Reserve is already the consolidated supervisor of some of the largest and most complex institutions in the world. I believe that the expertise we have developed in supervising large, diversified and interconnected banking organizations, together with our broad knowledge of the financial markets in which these organizations operate, makes the Federal Reserve well suited to serve as the consolidated supervisor for those systemically important financial institutions that may not already be subject to the Bank Holding Company Act."

Supporters of the CFPA argue that the current system has failed to protect consumers and more drastic measures must be taken.

"If the status quo is about choice, then explain why half of those with subprime loans chose high-risk, high-cost loans when they qualified for prime mortgages. The truth is, no consumer chose to accept the tricks and traps buried in the legalese of financial products," Elizabeth Warren, overseer of the Troubled Assets Relief Program and Harvard Law School professor, wrote in an online post defending the CFPA.

The House Financial Services Committee's most recent draft of legislation to create the CFPA attempts to placate critics by clearing up the definitions of who will fall under CFPA regulation -- non-financial businesses that offer credit systems would not, nor would real estate brokers or accountants -- and stressing that the CFPA will work with existing agencies to minimize the regulatory burden. However, The New York Times reports that the move would exempt more than 98 percent of banks from the agency's oversight.

A rift has also developed among supporters of the CFPA. A contingent of moderate and conservative Democrats -- with support from the financial services industry -- recently said that their support of the CFPA legislation hinges on its including language that bars states from enacting tougher regulations than those created by the CFPA. They argue that allowing states to enact their own tightened regulations would create a patchwork regime of regulation that would confuse consumers and hamper the financial services industry.

Update: On Oct. 22, the House Financial Services Committee voted in favor of creating the CFPA; the previous day it had compromised on state vs. federal regulatatory powers. Under the compromise, the Office of the Comptroller of the Currency would be able to override state regulations if the law "significantly" interferes with federal regulations.

The Regulation of Derivatives

As of October 2009, the House Financial Services Committee (overseer of the SEC) has approved a bill to regulate the derivatives market. The House Agriculture Committee (overseer of the CFTC) has drafted a similar bill that they will vote on on Oct. 21, 2009. The two bills are expected to be reconciled and brought to a vote on the House floor later this fall. Here's an overview of the key points in the two bills and areas where the CFTC fears the current legislation falls short.

Key points from the Financial Services Committee bill (PDF) (approved by the committee on Oct. 15):

Key points from the Agriculture Committee bill (PDF) (Update: Passed by the committee on Oct. 21, 2009):

Key points from the CFTC's Response (PDF):

posted october 20, 2009; updated october 23, 2009

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