Current State of Financial Reform | March 25

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Executive Summary

The Senate bill is lacking in many of the essential areas for reform. Here are specific, targeted ways of strengthening the Senate bill:

  • Hard limits related to both size caps relative to GDP and leverage ratio must be specified in the bill. This will put a floor to the difficulty of resolution and the damage to the economy.
  • The Volcker Rule should be accepted outright, rather than through the decision of the Financial Stability Oversight Council.
  • The Bureau of Consumer Financial Protection must have full rule-making authority over non-bank lenders, including auto lenders.
  • The Bureau of Consumer Financial Protection must keep its lack of preemption over state regulation.
  • The derivatives section should be included to require all standardized derivatives to trade on an exchange with clearing, keeping with the original financial regulatory reform language introduced by President Obama in June of 2009.
  • The Financial Stability Oversight Council should not have the ability to alter the derivatives rules, override the Bureau of Consumer Financial Protection or change other regulations by a vote.
  • Early remediation requirements should be defined as to intervene earlier than the event of financial decline for a large systemically risky financial firm with a rule written by Congress.
  • There should be more focus on investing in high end, internationally focused position monitoring for large systemically risky financial firms.
  • In the light of recent scandals, there should be extra language included that targets fraud in accountancy and directly addresses issues of off-balance sheet reform.

Talking Points

  • There is too much discretion in the Senate Financial Reform Bill. Some hard numbers, like absolute leverage requirements or size caps relative to GDP, should be written into the legislation like in the House Bill. We shouldn’t expect regulators to be perfect, but mostly to carry out simple rules.
  • The Financial Stability Oversight Council this bill creates has too much discretion to overrule the bill after it goes into effect, by either waving requirements for derivative contracts, vetoing consumer protection laws, or refusing to abide by the Volcker Rule. If it is run by people who care more about the profits of big banks than the stability of our real economy, it could override a lot of our fragile regulation.
  • Remember that derivatives reform is an essential part of resolution authority reform, and that without the former the latter is significantly weaker.
  • Sunlight is the best disinfectant. Keeping derivatives on exchanges, allowing consumers to be well informed of the contracts they face and regulators aware of when and how they can wind down a large financial firm will help our real economy grow into the 21st Century after this financial sector trauma.

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Michael Konczal, a Fellow with the Roosevelt Institute, works on financial reform, structural unemployment, consumer access to financial services, and inequality. He blogs for New Deal 2.0 and the Rortybomb, and his work has appeared at The Atlantic Monthly’s Business Channel, NPR’s Planet Money, the Baseline Scenario, Huffington Post, and The Nation. He was formerly a financial engineer and mathematical analyst. Konczal holds a MS in Finance and a BS in Mathematics from the University of Illinois at Urbana-Champaign.

The views and opinions expressed in this paper are those of the author and do not necessarily reflect the views of the Roosevelt Institute, its officers, or its directors.

Email Michael Konczal or call 212.444.9140