The US Congress is on the verge of passing the most sweeping financial regulatory reform bill since the Great Depression and the result of its passage will affect every investor in the US. Fundamental financial reform is necessary in order to bring back stability in our economic system. There is no sane reason why the entire marketplace should trade as if it was completely made up of penny stock securities. Institutions that make significant contributions to global economies should fulfill their societal responsibilities as stable and mature institutions and not imagine themselves to be rapid growth profit-seeking start-ups. To some extent, pressure from shareholders is as much to blame as the management of firms. When financial institutions fail the whole system is put at risk and countless livelihoods and firms can be thrown into jeopardy.
Globally, financial crashes have happened once every eight to ten years since the repeal of Glass-Steagall. The repeals purpose was to make US banks more competitive with their counterparties in other areas of the world, however the flood gates were opened up when the law was turned over by Congress. The critics of the Financial Overhaul Bill are wrong to say that it’s “window dressing†because every bill can be considered “window dressingâ€. It’s not the bill itself that ultimately changes the environment but the enforcement of the bill. If agencies fail to act, as they have been doing for the past decade, then this bill is essentially not worth the paper it has been written on, but if agencies renew their sense of purpose and commitment to protecting the American people then this bill could actually mean something to the United States.
The following is a short summary of some of the main elements of the bill:
- Establishes New Regulatory Authority: FDIC can seize and break up troubled financial firms and other financial firms will have to pay for it — This may encourage financial institutions to not permit other financial institutions to take risky bets
- Financial Stability Council setup: Council would recommend ongoing changes to the system to the Fed —The council seems like a body that will try to keep up with a changing financial system and environment, but purely depends on the competency of the members of the council.
- Volcker Rule: Banks would be allowed to invest up to 3% of tier 1 capital in hedge funds or private equity firms — This action will do little if anything to change the conflict of interest that exists between banks and trading operations.
- Derivatives Oversight: Derivatives will be regulated and would require clearinghouse approval — Brings long–needed transparency into this marketplace.
- Consumer Agency Created: The Consumer Financial Protection Agency would have rulemaking and enforcement power through the Fed over banks and non-bank financial firms — Meant to make sure the average consumer isn’t being cheated by legal jargon or fine print.
- Oversight Updates: Enables the Fed to supervise the largest and most complex financial firms to monitor potential systemic risks — Gives the Fed broader authority to monitor potential risks.
- Bank Capital Classification: Trust–preferred securities would no longer be treated as tier 1 capital unless the bank has less than $15 billion in assets — Eliminates banks from treating debt like securities as tier 1 capital.
- Bank Fee Implementation: A fee on financial institutions with more than $50 million would be imposed and hedge funds with more than $10 billion in order to pay for this program — Finally the banks have to pay a fee.
- Mortgage underwriting: Standards will be introduced that will help lenders verify that a borrower is financially capable of servicing and amortizing their loan — This protects honest and unknowledgable home buyers from lender and buyer abuse.
- Bank Loan Conflict of Interests: Banks would have to keep 5% of the credit risk on their books — This should align the interests of the bank with the debt investor base.
- Credit Agencies: New quasi–government agency would be established to address conflicts of interest in the credit rating business model. Would also enable investors to sue credit rating agencies for knowingly and recklessly failing to conduct an investigation — The conflicts of interest in the credit rating agency business model is inherent in the industry and needs to be corrected in order avoid inaccurate ratings.
- Corporate Governance Democratized: Will give investors access to a proxy to nominate directors and give shareholders a non–binding vote on executive pay and severance packages —A non–binding vote will give the investor base some clarity and an obvious time to express confidence or no–confidence in the management team, however non-binding does nothing to enact the shareholder requests.
- Insurance Regulation: A new regulatory office of insurance will be established to monitor the insurance industry — The task of this office will be to monitor risk in an industry that monitors risk.