Senator Chris Dodd, Chairman of the Senate Banking Committee, has released a revised version of the financial reform legislation that intends to prevent another financial crisis. The bill has been redrafted after consultations with several Republicans and Democrats who had rejected the first draft.
The revised bill has incorporated many of the suggestions made by the Republicans, which critics argue would make the legislation ineffective. However, despite the changes, the Republicans have once again opposed the bill.
The key proposals of the bill are:
Consumer Protection Agency
The biggest change that Dodd has proposed is that there should be a consumer protection agency to prevent banks from exploiting customers. This is in response to the subprime crisis where lenders extended a huge number of risky loans that brought the whole financial industry close to a collapse. Many economists were demanding an independent agency to look after the interests of the consumers, but Dodd has agreed to Republican objections and has suggested creation of an agency under the Fed umbrella.
Regulation of Credit Rating Agencies
Credit rating agencies like Moody’s had come for severe criticism after they incorrectly assessed the risk on mortgage backed securities, which crashed in value once the housing prices fell. The bill proposes that these agencies should now be made responsible for their actions and they should be regulated by the SEC to prevent similar errors in future.
Limits on Trading Activities of Banks
The bill has also given a nod to the Volcker Rule, which will restrict proprietary trading of banks. Currently banks can invest the depositors’ money in risky hedge fund trades. Such trades brought many of the Wall Street banks close to bankruptcy as the financial crisis unfolded. Regulation has also been proposed on derivatives trading by banks.
Financial Stability Oversight Council
The council’s job would be to identify risks in the overall financial system so that they can be dealt with before they result in a large scale crisis. However, once again the Fed has been given most of the duties, while the council will only sign off on decisions.
The bill looks like a compromise formula, and it will certainly face a lot of opposition from both pro-reform and anti-reform camps. Another problem is that even if it is passed, the success of the legislation will not be tested until the economy faces another crisis, and at that stage it will be too late to make any changes.