With lawmakers intent on sending a final regulatory reform bill to President Obama by July 4, much of the legwork is already happening behind the scenes on how to tackle a host of unresolved issues, including a proposed swaps ban, a stringent capital requirement, interchange fee regulation and a consumer protection agency.
Interviews with analysts, industry representatives, academics and other sources point to a growing consensus on how some of these issues will play out. American Banker offers the following answers to frequently asked questions as a guide to the conference committee's work.
When does the conference committee start?
It will kick off Wednesday with opening statements. While lawmakers have promised the negotiations will take place in public, that appears unlikely, with negotiations already taking place behind closed doors.
"Nothing is going to happen in conference. Everything is going to happen beforehand. The conference is just going to kind of rubber-stamp it," said Kip Weissman, a partner in the law firm Luse Gorman Pomerenk & Schick. "It's not a question of openness; it's a question of ceremony. … It's very, very rare for there to be true negotiations in conference."
House Financial Services Committee Chairman Barney Frank is expected to chair the conference, but the Senate bill is expected to be the base text, which gives an advantage to provisions already included in that version.
Opening statements are likely to go on through next week, and substantive public discussion won't begin until June 15.
What are the most critical issues?
The House and Senate bills are similar in many ways, but the Senate version has several provisions not found in the House bill, including ones that would force banks to spin off their derivatives trading operations, regulate interchange rates on debit cards, eliminate the thrift charter and stop trust-preferred securities from counting as Tier 1 capital.
The two bills also confront national bank preemption in slightly different ways and differ on where a consumer agency should be housed and how it should be funded.
Will the derivatives provision survive?
The measure is expected to be heavily watered down or even dropped. Several regulators have argued that forcing banks to spin off their swaps desk would increase, not decrease, risk in the system, and the Obama administration is thought to oppose it.
The most likely scenario is that lawmakers will beef up the Senate bill's language on the Volcker Rule to ban proprietary trading to ensure it covers derivatives activities. Under the compromise, regulators could ban risky trading activities.
"I think ultimately the derivatives language and the 'Volcker' language will end up sort of meshing," said Josh Rosner, a managing director at the research firm Graham Fisher & Co. "Banks will be allowed to hedge for themselves and they'll be allowed to for customers, but anything that falls outside of that on the derivatives trading side — i.e., that is not for economic business purposes — will end up being forced outside the bank holding company."
What about the provision on trust-preferreds?
That, too, is likely to be moderated. At the behest of the Federal Deposit Insurance Corp., Sen. Susan Collins, R-Maine, added a provision to stop trust-preferred securities from counting as Tier 1 capital. (The FDIC argues it's really debt and doesn't absorb losses.)
But implementation of that ban would cause a huge drop in Tier 1 capital, a prospect that has many in the industry panicking.
While it could be stripped from the final bill, many expect such a restriction to be phased in gradually and existing trust-preferreds may be grandfathered. But conferees must tread carefully. Collins is one of only four Republicans who voted for the bill in the Senate and her vote on final passage will be crucial.
But the interchange amendment will be taken out, right?
Don't bet on it. Although state treasurers have joined bankers in opposition of the provision by Sen. Richard Durbin, D-Ill., that would require the Federal Reserve Board to ensure interchange fees on debit cards are "reasonable and proportional," the odds of removing the provision are slim.
Durbin and a slew of retailer groups are lobbying hard to keep the measure in the final bill, and argue the Senate's 64-to-33 vote on it is proof that it enjoys considerable bipartisan support.
"I don't expect significant watering down," said Brian Gardner, an analyst with KBW Inc.
"You could see some tightening of the language of what 'reasonable and proportional' means, how you define what the actual costs are for the issuers and the networks. … But I think the guts of the amendment, which is to instruct the Fed to regulate these fees … stays in place."
Both bills would eliminate the Office of Thrift Supervision, but what about the thrift charter?
It is likely to survive.
The House would keep the thrift charter while the Senate would grandfather existing thrifts but close off the charter to new applicants.
Senate Banking Committee Chairman Chris Dodd resisted efforts by Sen. John Kerry, D-Mass., to preserve the thrift charter during the regulatory reform vote, but most observers think he did so to preserve a bargaining chip for conference, not because he is committed to the issue.
Frank, meanwhile, has repeatedly said he wants to preserve the thrift charter.
What about the consumer protection agency?
That issue appears to be in flux. While the House would create a stand-alone agency, the Senate would place an independent bureau underneath the Fed. The Senate version may prevail simply because it has an easier funding mechanism — it would just draw money from the central bank.
I thought the preemption provisions in both bills would restore the Barnett standard. Why is there still a fight?
Both bills would allow the Office of the Comptroller of the Currency to preempt state laws on a case-by-case basis, but the Senate bill explicitly references the 1996 Barnett Supreme Court case, while the House uses its own language designed to emulate it.
The House bill also would add provisions that would require the OCC to prove a substantive federal standard addresses the same issue a state law attempts to tackle before it could be preempted.
The House would give the state attorneys general the ability to enforce any federal law against a national bank, while the Senate bill restricts them to just enforcing new rules from the consumer protection regulator.
Raj Date, the chairman of the Cambridge Winter Center for Financial Institutions Policy, said: "The Senate language is going to prevail. Sometimes I wonder whether the distinction is as big of a deal as the industry and the OCC lead themselves to believe, but I don't think it's going to be a big, contentious issue."
This story has been reprinted with permission from American Banker.
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