It’s not over yet.
After one of the most intense lobbying efforts in decades, the financial services industry will now need to navigate through a series of tough new regulations designed to control the risky bets and abusive lending practices that nearly brought down the global financial system.
Much of the final impact of the new law has yet to be determined, however, and though the bill is sweeping in scope, many detailed regulations have yet to be written.
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“There's still a whole new chapter, hundreds of mandates and studies that regulators have to take and translate this legislation into rules,” said John Taft, the chairman-elect of the Securities Industry and Financial Markets Association, one of the industry’s main lobbying groups. “So there's still a lot of uncertainty about how that will happen.”
The new law, if approved by Congress and signed by the president, would represent the biggest overhaul in financial regulations since the 1930s. It would restrict banks' trading in derivatives, create an agency to monitor risks to the financial system, create a system to shut down failing companies before they collapse and set up a powerful new consumer protection agency to police most forms of lending. The so-called “Volcker rule” would force large Wall Street firms to curtail their risky trading operations.
The compromise package is being hailed as a victory for consumers and proponents of tough financial regulation. Industry lobbyists failed to carve out many of the loopholes they had sought.
"We've all seen what happens when there is inadequate oversight and insufficient transparency on Wall Street," said President Barack Obama. "The reforms working their way through Congress will hold Wall Street accountable so we can help prevent another financial crisis like the one that we're still recovering from."
Obama, speaking from the White House lawn before he left for a summit of G-20 leaders in Toronto this weekend, hailed the bill as the toughest overhaul of the banking system since the Great Depression.
Much depends on how strictly regulators apply the new rules; lax enforcement of existing financial regulations played a major role in the rogue mortgage lending that was at the heart of the housing collapse and financial meltdown.
Consumer groups hailed the measure as a major advance in protecting bank customers from the kinds of lending abuses that went unchecked during the mortgage boom.
Under the proposed law, a new consumer protection agency would have oversight over all lenders with the single mandate of looking out for consumers. The current structure scatters that responsibility among numerous agencies that are also charged with protecting the “safety and soundness” of financial institutions. Proponents of the new agency say the creation of a separate, independently funded consumer watchdog will eliminate what they see as a conflict of interest.
Consolidating consumer regulations in one agency will also eliminate the opportunity for “regulator shopping” by financial institutions, a tactic that industry critics say contributed to the worst lending practices, according to Kathleen Day, a spokeswoman for the Center for Responsible Lending, which lobbied for the new consumer agency.
“Banks would say, ‘If you don’t let me do this I’ll go to Dad and he’ll give me the car keys even though I’m drunk,’” he said. “Now, regulated entities can’t say. ‘We don’t like your rules so we’re going to another regulator.’ That gives this new agency more authority.”
The bill's language has also eliminated dozens of loopholes that had been the subject of intense debate since the measure was first approved by House and Senate committees. Banks would be forced to give up profits generated by making risky bets with depositor’s money. Mortgages and credit cards will be subject to new rules. Fees on debit cards would be cut.
But bankers will likely figure out ways to adapt to the regulations, according to Richard Bove, a banking industry analyst at Rochdale Securities.
“Banks will get around these rules,” he said. “I don't have any question about the fact that they'll be able to raise a series of prices to offset the revenue losses that they'll see. And I don't have any question about the fact that they're innovative enough to figure out how to get around“ the new trading restrictions.
Investors seemed to agree: bank stocks generally rallied as Wall Street got a closer look at the measure’s final language.
Though the new law covers a wide range of financial services — everything from credit default swaps to payday loans — its reach is limited to U.S. companies. Even as a conference committee put the finishing touches on the 2,200-page package, leaders of the G20 developed countries were meeting in Toronto to continue ongoing discussions about global financial regulations.
Without a uniform set of rules about bank capital requirements or securities trading, much of the riskiest practices may simply move offshore.
"This idea that all of the countries in the world will agree to reform strikes me as naïve,” said Greg Valliere, chief political strategist at the Potomac Research Group. “There's got to be a country or two ... that will not agree to these reforms. And I think that there's a real risk that derivatives business could be driven overseas.”
Critics of the bill are also voicing concerns that the new restrictions on U.S. lenders will bring even more restrictions on lending at a time when the U.S. economy is struggling to get back on its feet. If the new rules bring tighter credit and higher borrowing costs, that could deal a further blow to the economy’s wobbly recovery.
“This is a populist surge of activity to say, ‘Hey, we're going to get the bad guys on Wall Street who did all of the bad things to you,’” said Bove. “But in terms of who gets hurt, it's definitely not the banking industry. It’s the U.S. economy, the U.S. consumer and the competitiveness of American banks around the world.”