Lawmakers return from summer recess today with grand plans to overhaul the structure of financial services regulation, but they are up against a rapidly dwindling legislative calendar without a clear consensus on how to proceed.

House Financial Services Committee Chairman Barney Frank and Senate Banking Committee Chairman Chris Dodd are still committed to sending a bill to the White House this year, but there are significant differences in how each would approach the various reform pieces. Lawmakers have yet to settle on nearly any part of reform, including the creation of a consumer financial protection agency and its powers, who should oversee systemic risk and how best to discourage institutions from becoming "too big to fail."

With Congress trying to adjourn by Oct. 30, observers expect a lot of activity but are hard pressed to see much reaching the finish line.

"There is still a tremendous urgency to get things done, but there is almost anarchy even within the Democratic Party now in terms of how to do it," said Chris Low, the chief economist at First Horizon National Corp.'s FTN Financial.

How far regulatory reform progresses may turn in part on whether Congress can pass a health-care reform bill, the dominant issue in Washington. If health-care reform is enacted, it would clear the decks for lawmakers to focus more on regulatory restructuring.

"Let's see what happens with health care because, if … they actually pass something in the next month, then I think that greatly increases the odds of reform this year," Low said.

Though Frank's agenda in the House is relatively clear, the Senate situation is hard to gauge. Dodd is expected to announce soon whether he will continue to lead the Banking Committee or give it up to chair the Health, Education, Labor and Pensions Committee, where he is the most senior lawmaker in the wake of Sen. Edward Kennedy's death.

Dodd has been working on a comprehensive draft reform bill that is expected to break from the administration in many areas, including consolidating all prudential supervision in a single banking agency.

If Dodd steps aside, Sen. Tim Johnson is next in line to chair the panel, but the South Dakota Democrat is expected to take his own approach to regulatory modernization. A moderate who often sides with community banks, which oppose a single regulator, he has also expressed doubts about the need for a separate consumer financial protection agency.

In the House, Frank plans to pick up where he left off before the recess with an ambitious schedule on regulatory reform. At the top of the list is a vote on the consumer financial protection agency, which ran into tougher opposition than expected before the recess and was pushed back to give members more time to work out issues and build support. A vote on the bill has been tentatively scheduled for the week of Sept. 23.

The issue is arguably the most crucial for the banking industry, which opposes it. Several aspects of it are up for debate and could change, including federal preemption, enforcement authority, product requirements and the scope of entities covered.

One element likely to be altered is a requirement that lenders first offer standard or "plain-vanilla" products before offering alternative products. Many lawmakers have said the idea is all but unworkable, and it is not expected to be included in the Senate Banking Committee bill.

It is unclear, however, whether some form of it may survive, such as providing incentives to banks that offer standard products and a safe harbor from liability for doing so. Another possibility is that lenders could satisfy the standard with disclosures that show borrowers a basis for comparing their loan against simpler terms.

Frank cast aspersions on the original concept during a speech at the National Press Club this summer. "I don't think you can force people to offer a palatable product," he said. "Going back to my youth, I remember when there were bars that were told they couldn't just serve liquor; they had to serve food. And they served the most inedible food known to man. I can still remember the jars of pickled hard-boiled eggs that sat on the counters of some bars. We're not going to make bankers offer people pickled hard-boiled egg mortgages."

As introduced, the bill would also gut federal preemption by allowing state attorneys general to enforce state and federal standards against all state and nationally chartered banks.

Several moderate Democrats privately have argued that this goes too far and that they could seek to scale back the power of states to regulate national banks.

"It's not clear yet what will happen on preemption, but there are plenty of members who have concerns," said a Democratic aide who spoke on condition of anonymity.

Another open issue is to what extent a consumer protection agency would have examination authority over banks, or whether it would write rules that could be enforced by existing bank regulators. Frank has suggested at least coordinating exams to cut down on the burden, and Michael Barr, the Treasury Department's assistant secretary for financial institutions, said last month that exams could be risk-based, potentially giving smaller banks a break.

"I do think that community banks could use less supervision and examination than very large financial firms offering a wide range of complex products," Barr said in an interview.

Sheila Bair, the chairman of the Federal Deposit Insurance Corp., has argued that culling her exam force for the new agency would be costly and counterproductive.

"We strongly, strongly recommend the examination and enforcement component [stays] with the bank regulators," she said at a Senate Banking Committee hearing in July. "There are important synergies between prudential and consumer supervision. We typically cross-train our examiners … ; abusive mortgages that are abusive to consumers are also unsafe and unsound, and frequently we will find those consumer affairs problems."

Other regulators have also weighed in against the plan, arguing that safety and soundness and consumer compliance are inherently linked.

Community bankers in particular have been lobbying hard for a pass from the costs and burdens associated with the proposed consumer agency. They argue that a new agency dedicated to mortgage lenders and others outside the banking sphere makes more sense.

"The potential is there for CFPA to be actually helpful for the banking industry provided that its focus is not on the folks who are already regulated but on the unregulated," said Steve Verdier, a senior vice president for the Independent Community Bankers of America. "The agency is going to have a lot of work just getting under way, and I think it would make a lot of sense for them to focus on trying to build up their supervisory staff to deal with those unregulated institutions."

Still, proponents of the bill say they expect the core of it will survive the committee process.

"My expectation is that we are going to go into a markup with the proposal that is already out there, and of course members will introduce their amendments and we'll vote on them, but at this point, I think the essential elements of the consumer financial products agency … will remain intact," said Rep. Keith Ellison, a sponsor of the bill, in a Sept. 3 call with reporters.

Even if the bill clears the Financial Services Committee, many observers said it will be all but impossible to pass it through both chambers this year.

"It's headed into a traffic jam," said Jaret Seiberg, an analyst with Concept Capital's Washington Research Group. "It is going to be a very difficult fight, and while it can move in committee, the idea that it could quickly move through the House and the Senate just isn't realistic."

Another key part of the regulatory overhaul plan is to try and curb "too-big-to-fail" institutions by creating a systemic risk regulator and expanding the FDIC's authority to unwind nonbanks and bank holding companies in an orderly fashion.

The Obama administration has dug in on its desire to give the Fed systemic risk authority, but expanding the power of the central bank remains extremely unpopular on Capitol Hill. Lawmakers in both chambers have expressed a preference for an interagency council that would oversee systemic risk.

Observers said the administration has to do a better job of convincing lawmakers on the issue or come up with a compromise soon. "It's getting more difficult as time goes on to actually put into place meaningful reg reform," said James Barth, a senior fellow at the Milken Institute. "There seems to be some growing discontent with President Obama's reg reform proposals. In particular, I'm pointing to the issue of who should be the systemic risk regulatory authority, whether it should be the Federal Reserve or if it should involve some combination of other regulatory authorities."

It is also unclear how much consolidation will occur. Though Dodd leans toward combining all bank regulators into one agency, stripping supervisory powers from the FDIC and Fed, Frank has publicly dismissed such an idea. The Massachusetts Democrat has endorsed the Obama proposal, which would merge the Office of Thrift Supervision with the Office of the Comptroller of the Currency.

Arguably, the part of the reform plan with the most momentum could be a drive to better regulate derivatives. Frank and House Agriculture Committee Chairman Collin Peterson, D-Minn., announced July 30 that they had agreed in principle on an outline for derivatives reform. The two have not introduced a bill, but they appear in tune with language floated by the Treasury Department last month.

Overall, observers said regulatory restructuring is likely to be an issue through at least next year.

"It's going to be quite difficult to achieve any sort of meaningful deep reg reform this year," Barth said. "It's not clear that there is any consensus on exactly what caused the crisis in a meaningful way and what sort of regulatory reform ought to take place."

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