A powerful Senate committee proposed the widest-ranging reforms to US banking regulation since the financial crisis, including stripping the Federal Reserve of many of its powers.
The Senate Banking Committee unveiled a Bill that would remove responsibility for bank supervision from the central bank and the Federal Deposit Insurance Corporation (FDIC) and give it to a new regulator called the Financial Institutions Regulatory Administration.
At present the Fed oversees bank holding companies and the FDIC supervises state banks.
Launching the new Bill, Senator Chris Dodd, the chairman of the committee, accused the Fed of having been an “abysmal failure” as a bank regulator.
He said that the Fed should return its focus to monetary policy and last-resort lending.
Advertisement
Under the Senate committee’s proposal, a new board led by the Fed would monitor for problems caused by financial groups becoming too big to fail.
The Senate committee’s Bill goes much farther than President Obama dared when he announced proposals for regulatory reform in June.
The White House had initially been expected to remove power from existing regulators but under fierce lobbying from the supervisors ended up expanding the Fed’s power, disappointing lawmakers and consumers who blame the supervisors for failing to prevent the credit crunch.
Ben Bernanke, the Fed Chairman, has continued to fight attempts to reduce the central bank’s empire.
Last month he insisted that the Fed’s ability to create effective monetary policy relied heavily on its role as a bank regulator.
Advertisement
The House Financial Services Committee is also working on a regulatory reform Bill, on which it is expected to vote next month.
The House committee’s Bill is less severe than that of the Senate, leaving more power with the Fed.
Barney Frank, chairman of the House committee, welcomed the Senate’s Bill, which he said showed that both committees were “moving in the same direction”.
“[It] reaffirms my confidence that we are going to be able to get an appropriate, effective reform package passed very soon,” Mr Frank said.
Both houses will discuss their respective Bills before they go to a conference committee comprising members of both houses to be made into a single piece of legislation, which must then pass through both houses again.
Advertisement
The legislation is not expected to be finalised until next spring.
Lawrence Caplan, an attorney with Paul Hastings, where he specialises in regulatory issues, said that Senator Dodd’s Bill would please critics who believed that the White House’s and the House’s attempts at reform were “half-baked”.
“If we’re going to have comprehensive reform, let’s do it,” he said. “The Senate is suggesting fundamental restructuring, real reform that fixes all the problems.”
But Mr Caplan warned that many of the hardest-hitting elements of the Senate Bill could be watered down in the legislative process.
“There’s no guarantee any of this will go through,” he said.
Advertisement
Robert Weissman, the president of Public Citizen, a non-profit public interest group, advised lawmakers to act quickly or risk losing their seats next November, when at least 36 of the 100 seats in the Senate and all House seats come up for election.
“The legislation that has so far progressed in Congress is not commensurate with the scale of the crisis Wall Street caused,” Mr Weissman said.
“Some in Congress may believe that public anger over Wall Street has dissipated and, therefore, they will not be held accountable for siding with Wall Street in regulatory disputes.
“They are mistaken and risk facing a rude surprise in November 2010.”
The Treasury yesterday released the latest information on the Government’s Making Home Affordable programme, under which banks help struggling homeowners to renegotiate their mortgages.
Advertisement
About 650,000 homeowners have been granted trial modifications so far.
The Treasury said that the programme was on track to assist the four million homeowners it targeted over three years.
The banking sector had previously been criticised by the Treasury for being too slow to make modifications and many experts remain sceptical of the programme.
Moody’s calculates that about 4.6 million people will lose their homes by the end of next year alone and nine million by the end of 2011, despite the loan modification programme.
Terry Moore, managing director for the North America banking industry at Accenture, said that it was vital for the banks and the wider financial market that the programme worked.
“Decreasing the number of foreclosures is good for consumers because it allows them to keep their homes, it’s good for the banks because it keeps down expenses and it’s good for the market because it provides more stability,” Mr Moore said.
“It costs a bank $50,000 or more every time they foreclose on a property.”