Financial Regulatory Reform


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By Bill Swindell

Large financial firms ramped up their efforts Monday to soften language that would give power to federal regulators to break them up if their size posed a risk to financial markets.

Their main concern centered on amendments to be attached to legislation giving the federal government the power to take over large at-risk financial firms and place them into receivership -- preventing any more bailouts of firms such as American International Group.

The House Financial Services Committee will continue its markup on the measure today and is looking to finish it by the end of the week. The bill would also create a council of regulators that would monitor the nation's markets.

At the top of their list is an amendment by Capital Markets Subcommittee Chairman Paul Kanjorski, D-Pa., that would give regulators pre-emptive authority to break up big banks and other large firms they fear could collapse because of risky investments. Kanjorski wrote in The Huffington Post over the weekend that he wants to give power to regulators to break up large institutions "even if those firms currently appear to be well-capitalized and healthy."

That stance has large firms worried and their lobbyists were working with Kanjorski on ways to make the language less severe. In a Monday letter to Financial Services Chairman Barney Frank, Rob Nichols, president of the Financial Services Forum, said the presumption that large firms are riskier to the safety and soundness of the markets is false.

"Large institutions are also far more diversified in their business mix as compared to smaller institutions, which tend to be engaged in fewer businesses and regions, and, therefore, are exposed to greater concentration of risk," Nichols wrote. "Rather than being a source of risk, size can actually mitigate risk."

Other members are crafting similar amendments. Rep. Ed Perlmutter, D-Colo., wants to give regulators the power on a case-by-case basis to separate a firm's traditional banking operations from its riskier activities, such as investment banking, if it led the institution to engage in actions that could threaten financial stability.

Rep. Brad Miller, D-N.C., is exploring whether to offer a measure that could separate a firm's proprietary trading actions -- transactions conducted for an institution's own benefit -- from its retail services. Former Federal Reserve Chairman Paul Volcker has suggested such restrictions on such trades, which are profitable for large banks. Miller said he might combine his efforts with Perlmutter.

Fed Chairman Bernanke Monday expressed some skepticism about such a ban, noting that such proprietary trading can allow a firm to hedge their positions and reduce risk. He added that regulators should be able to examine the issue on a case-by-case basis.

"It would be difficult to say with a sharp bright line that banks should not be allowed to engage in any kind of proprietary trading, in a sense of holding positions on their own books as opposed to their customers' books," Bernanke said in response to a question at an Economic Club of New York event.

Against a backdrop of bailout fatigue, lobbying for some flexibility against pre-emptively dismantling companies is an uphill struggle, especially because moderate and conservative Democrats on the panel have not yet stepped up to raise concerns. "What's striking is that all these factions of the Democratic Caucus are thinking alike," Miller said in a recent interview.

One K Street lobbyist said some outreach has focused on the job losses that could happen in financial centers if firms would be forced to downsize against their will, specifically focusing on New York City-area Democrats on the panel such as Reps. Gary Ackerman, Gregory Meeks, Carolyn Maloney, Carolyn McCarthy and Michael McMahon, and Melvin Watt, D-N.C., who represents the Charlotte banking center.

"If you're doing something along the lines of pre-emptive breakup of healthy institutions, [then] you're ceding global finance to the Chinese and Japanese," the source said. "It would wreck us from a competitive standpoint."

The panel also will debate other issues surrounding the bill. At the behest of credit unions, Rep. Brad Sherman, D-Calif., has offered an amendment that would expand the current threshold in the bill that would require financial firms with more than $10 billion in assets to pay into a fund that would be used by federal regulators to take over large at-risk institutions and dismantle them, similar to what the FDIC does for banks. The Sherman amendment would boost the limit to $75 billion -- exempting the three credit unions that currently fall under the bill -- and index it for inflation.

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fsforum Big Banks Dispute Fed's Case for Physical Commodities Restrictions http://t.co/gnkYrAQR18 via @AmerBanker's @donnaborak
fsforum RT @petejryan: Recent research lends credence to @ForumPrez argument that the #TBTF phenomenon is fading http://t.co/UmkQymEr9I
fsforum Financial trades push back on commodities crackdown http://t.co/px3uzcwo1d via @hillsonthemoney

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The Financial Services Forum is a non-partisan financial and economic policy organization comprising the CEOs of 18 of the largest and most diversified financial services institutions doing business in the United States.

The purpose of the Forum is to pursue policies that encourage savings and investment, promote an open and competitive global marketplace, and ensure the opportunity of people everywhere to participate fully and productively in the 21st-century global economy.