Senate Banking Committee Chairman Chris Dodd's revised regulatory reform bill is likely to call for the creation of a powerful new agency with supervision of all holding companies and all federally chartered subsidiaries, according to sources familiar with the panel's negotiations.
While sources cautioned the details of the legislation are still in flux, a current draft of the bill would create the Financial Institutions Regulatory Administration — essentially a combination of the Office of the Comptroller of the Currency, Office of Thrift Supervision, and the banking supervisory responsibilities of the Federal Reserve Board.
While the Federal Deposit Insurance Corp. would continue to have oversight of state-chartered banks, and pick up the Fed's state member bank oversight, FIRA would supervise everything else, including all systemically important banks and nonbanks.
The draft bill would call for the creation of a systemic-risk council led by the Treasury Department that would identify and write rules for large financial companies. For months the conventional wisdom has been that the Fed would ultimately supervise the most systemically significant firms, as proposed by the Obama administration.
But other than a seat on the systemic council, where its representative would serve as vice chairman, the Fed would have no direct oversight of any banking company under the bill.
The draft bill represents ongoing negotiations between Dodd and Sen. Bob Corker, R-Tenn., and its details were likely to be shared Wednesday evening at a meeting with the two lawmakers and Treasury Secretary Tim Geithner. Sources cautioned that the lawmakers continue to hash out specific details of the bill, and provisions could be changed as they negotiate with other parties.
At least one area that remains in play is the new agency's consumer protection mandate.
Lawmakers are considering requiring FIRA to have a separate consumer protection division that could be headed by a presidentially appointed director, sources said. The division is likely to write consumer protection rules that would be enforced by the new agency, state supervisors and the FDIC.
Still, many Republicans remain wary of a separately empowered entity in charge of consumer protections. While the director of FIRA is likely to resolve any conflict between consumer protection and safety and soundness regulations, it is unclear if that is acceptable to Corker or others in the GOP. The administration, too, has been pushing for a separate consumer agency, though there are signs in recent days it has been willing to deal.
Also potentially problematic is giving the Treasury a lead role on the systemic-risk council—a move that could make banking regulation much more political.
Under the bill, the council would include representatives of Treasury, the Fed, the FDIC, FIRA, the new agency's consumer bureau, the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Housing Finance Agency and one other independent presidentially appointed member with a background in insurance. The risk council would be charged with identifying systemically important banks and nonbanks, which could include insurance companies, hedge funds, investment banks or other types of companies to be placed under the supervision of FIRA.
The protocol for identifying such institutions is still being worked out. The council would meet quarterly but could meet more frequently at the will of the Treasury secretary and would be responsible for identifying and monitoring emerging systemic risks.
The council could issue general supervisory guidance to regulators on any topic it deemed action was needed such as capital, risk management or executive compensation, but it would leave the specific rulewriting and implementation to FIRA and other agencies.
The bill is also designed to prevent the government from bailing out systemically important firms. Under the draft, most bank holding companies would have to go through a revised bankruptcy process. If the government wanted to put a systemically holding company in receivership, the Treasury secretary and majorities of the FDIC and Fed boards would have to sign off on the move. The FDIC would then act as resolver for the firm in conjunction with its functional regulator.
The resolution process would include firing management, wiping out shareholders, subjecting unsecured creditors to losses and the failure or dissolution of the firm. There would be no recourse for life support or an option for conservatorship in which the institution might again emerge on its own.
"It's institutional managed death," said a source close to the negotiations.
Though the Obama administration has pushed Dodd to include the so-called Volcker Rule in the bill, which would ban proprietary trading and limit investment in hedge funds, the draft leaves limits on large institutions largely up to regulators.
This story was reprinted with permission from American Banker.
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