A Final Chance to Strip Down Regulatory Reform

Wait, wasn’t the regulatory reform conference over? In a surprise move, conference members reconvened yesterday “in an emergency session to salvage votes” for the bill they passed out just last week. Now that they have dropped the $19 billion bank levy and raised FDIC premiums, can they move on? In my opinion, no. The emergency conference is just the latest evidence that the bill passed out last week is nowhere near complete.

I have said many times now, while I don’t necessarily agree with the three core elements of the bill – resolution authority, systemic risk regulation, and consumer financial protection – I can at least say that they have been sufficiently debated to the extent that Congress is reasonably unified around the concepts. The rest can go.

Consider, well, the bank levy. That was a last minute addition that didn’t survive long.

Similarly, as I wrote back when deposit insurance coverage was expanded, banks have long pined or expanded coverage – but balked some years back with the FDIC relented, but told banks they’d have to pay higher premiums. Hence, what was playing out then, and now, was a long-term power struggle, not a short term crisis-related element of reform.

The same is true of many elements of the bill. Interchange regulation is an issue that has been raised many times previously, without merits to proceed independently. Federal Reserve audits have little to do with the crisis – in fact, it is difficult to argue that the Federal Reserve acted harmfully in the heat of the moment. Elements of the bill related to credit rating agencies (suffering from Franken Amendment as well as PSLRA liability problems) and “skin in the game” (exempting some arbitrary collateral types, particularly those affiliated with the GSEs) face similar shortcomings.

Other elements of the bill related to crisis reform just aren’t well-thought out yet. Derivatives reform has continued to incorporate new carve-outs, including many for specific end-users and a final exemption for a bank owned by Wal-Mart in Blanche Lincoln’s own district. Moreover, derivatives reform and the much-vaunted Volcker Rule really don’t mean anything, as written. Their vague wording will allow them to be implemented nearly any way regulators choose, as “primarily” engaged in underwriting eligible securities required interpretation under Glass-Steagall and the “business of banking” required interpretation under the McFadden Act. Both of those opened the pathway to supposedly unbridled deregulation that allegedly caused the crisis. Why replace them with similarly vague provisions?

No, the reform bill as a whole is nowhere near ready for passage. Nonetheless, the “emergency” conference gives me a brief glimmer of (audacious?) hope that less disruptive approach may still be possible. Pass the three core elements of the bill if you must, but leave the rest behind.

Note: In search of relief from the politics of “reform,” I will not be writing next week, but will be seeking comfort in touring France’s wine country. I wish you all a happy Fourth of July holiday!


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