Chris Dodd, Democratic chairman of the Senate banking committee, on Monday proposed a tougher-than-expected curb on proprietary trading in a financial regulation bill that injected new momentum into reform efforts.
Key Republicans warmed to the bill, saying it was close to a product they could support, but much of the financial industry and some consumer advocates continue to oppose it.
The bill instructs regulators to study and then enforce the “Volcker rule” in spite of Mr Dodd’s earlier frustration at the White House for pushing a ban on deposit-taking banks from trading for their own account, which has been advocated by Paul Volcker, the former Federal Reserve chairman.
However, the financial industry is still betting that the rule will be softened amid scepticism from Republicans and Democrats.
Mark Warner, a Democratic senator from Virginia, yesterday told the Financial Times: “I don’t necessarily think it needs to be a mandate.”
People drafting the legislation believe Mr Dodd will have to make more compromises to secure the support of Republicans, a step vital to passing the legislation.
Although no Republican has expressed immediate support, members of the party said they were closer to agreement after Mr Dodd revised earlier proposals.
Richard Shelby, senior Republican on the banking committee, told CNBC that he and Mr Dodd “conceptually agree on 85 or 90 per cent of a bill”.
Bob Corker, a Republican senator from Tennessee, said he would work to “hopefully make it a bill that can receive broad bipartisan support”.
Barney Frank, Democratic chairman of the House financial services committee, who last year secured passage of his own regulation bill, said the two texts were “more alike than they are different” and could be merged in spite of earlier qualms about the direction of Mr Dodd’s legislation.
The Senate bill would introduce an “orderly liquidation” for failing financial firms that are systemically important, give investors a “say on pay” in boardrooms and boost protections for consumers of financial products.
Much of the debate has centred on the Obama administration’s proposed Consumer Financial Protection Agency, whose powers to ban financial products have worried Republicans. Mr Dodd’s proposal abandoned a stand-alone agency but housed a consumer bureau inside the Fed.
The Fed also retains bank supervision powers. The new proposal would bar appointments of Wall Street bankers as directors at the New York Fed.
There is continued disagreement over the scope of new enforcement powers, with Mr Corker arguing that an unrestrained consumer division could threaten banks’ soundness, but aides believe the divide can be bridged in the next few weeks.
Judd Gregg, a Republican senator, warned Mr Dodd not to press ahead with a plan to vote the bill out of committee next week. “The hyper-partisan process of false deadlines has undermined any chance for bipartisan, sensible health care reform, and with a bipartisan solution on financial regulatory reform within our grasp, I hope the majority will not repeat the past mistake,” he said.
Get alerts on Banks when a new story is published