Last updated: June 28, 2010 12:00 am

US banks face more sweeping overhaul

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Large US banks such as Citigroup could face a more draconian overhaul than they expect, according to people involved with drafting financial reform legislation.

Financial institutions have expressed relief that Friday’s marathon session to finalise the language of the Wall Street bill did not produce a harsher text. But congressional aides say that more sweeping reform – including forced sales of businesses at the largest institutions – could yet be ordered by a combination of regulators and lawmakers.

Neal Wolin, the deputy Treasury secretary, told the Financial Times that the legislation had struck a fair balance and banks had no right to complain about a proposed $19bn (€15bn, £12.6bn) levy.

“Relative to the amount paid in compensation, in bonuses – and relative to the enormous benefits of having a safer, more stable financial system – the fee is really not a significant burden,” he said.

The Dodd-Frank Wall Street Reform and Consumer Protection Act is set for final votes that could come on Tuesday in the House of Representatives and Thursday in the Senate. If the legislation is approved, President Barack Obama will sign it into law at the end of the week.

The bill instructs regulators to carry out of wide-ranging studies and report back to Congress. They could force institutions to divest riskier businesses as well as imposing stricter capital requirements.

Acquisitions could be impossible for Bank of America and more difficult for other groups after a new concentration limit is introduced. This stops any institutions from owning more than 10 per cent of financial companies’ assets – but “financial companies” is defined narrowly, excluding most hedge funds and private equity firms – and therefore acts as a significant curb on growth.

Capital raising alone is set to prove difficult for companies, which will have to set aside more capital against their riskier – and usually most profitable – operations as well as complying with the broader global overhaul under discussion by the Basel committee of bank regulators.

“There’s no doubt that the legislation that is on its way towards enactment in Congress will require some of these firms in a range of ways to raise more capital, better quality capital,” said Mr Wolin.

Whether or not regulatory studies result in a more stringent restructuring will depend partly on the political and economic climate while rules are considered and implemented. The text to be signed into law is tougher than the Treasury blueprint published last year. But there is substantial leeway for regulators and Congress.

Mr Wolin defended the “Volcker Rule”, which prevents banks from proprietary trading, imposes conflict of interest rules and restricts hedge fund ownership. “The goal here was to ensure that banks, which benefit from federal deposit insurance, the Federal Reserve discount window, and Federal Reserve payment systems, don’t expose the taxpayer to loss by engaging in these kinds of activities that have a greater amount of risk or volatility associated with them.”

An element of doubt about the legislation’s passage emerged on Sunday when the office of Robert Byrd, the 92-year-old Democratic senator from West Virginia, said he was seriously ill. Scott Brown, the Republican from Massachusetts who had supported the measure, signalled his reservations about the proposed $19bn bank levy. “I’ve said repeatedly that I cannot support any bill that raises tax,” he said.

Additional reporting by Daniel Dombey

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