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May 17, 2009 11:30 pm
Congress will next month start the biggest regulatory overhaul of the US financial system in decades, bringing into the open a frantic lobbying effort between banks, regulators and policymakers on what it contains and who pays for it.
The House financial services committee, chaired by Democrat Barney Frank, will hold hearings early in June into reforms outlined by Timothy Geithner, Treasury secretary, say people familiar with the timetable.
But the complexity, coupled with a crowded legislative agenda, means one key pillar – a resolution authority allowing a regulator to seize a failing bank holding company – is not likely to be put in place until year-end.
The cost of the resolution authority and a proposed systemic risk regulator could be borne by both large banks and small, according to people involved, in spite of the entreaties from the hundreds of small US institutions that they should not pay a levy.
Cam Fine, chief executive of the Independent Community Bankers of America, said the authority “should be totally funded by those institutions that are regarded as systemically important or too big to fail”. He said he “felt pretty good about where we stand” and was confident of Mr Geithner’s support.
Other smaller institutions such as hedge funds are also expressing concern that they will suffer from severe “haircuts on contracts” entered into as counterparties with the seized institution, according to one lobbyist.
Sheila Bair, the chairman of the Federal Deposit Insurance Corporation, has been lobbying for early introduction of seizure powers that could be used to take over a large systemically important bank if it was severely weakened by another sudden downturn in the economy.
The FDIC has a long-established system of seizing deposit-taking institutions, running them for a short time before winding them down or selling them, all with the aim of protecting depositors. But the largest banks are organised into bank holding companies, which stand outside current powers.
Mr Geithner has said new powers would allow for an orderly winding up of a systemically important institution, avoiding a repeat of the messy fall-out from Lehman Brothers’ collapse last year or the expensive bail-out of AIG, the insurer.
But several people involved say the way the regulation is interlinked means it would be difficult to fast-track a resolution authority specific to bank holding companies. The current timetable envisages the legislation being voted in the House in the summer and in the Senate late this year.
The eventual legislation is likely to leave open the question of which institutions count as “systemically important” and fall under the new authority’s power. People familiar with the plans say there is reluctance to draw up any fixed list or set of criteria; it would be better, they say, to maintain a certain ambiguity in order to maximise flexibility and induce a sense of caution.
Details of the regulatory overhaul – which also includes increased supervision of the retail market for financial products, standardising rules governing deposit taking institutions and increasing oversight of over-the-counter derivatives – are still being debated.
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