The Banking Bill is Pretty Much a Done Deal
House and Senate committees worked through the night last night to reconcile their two versions of banking reform legislation and announced this morning that their work was done. Based on the early reports, its not entirely clear what the full impact will be on bank-backed energy trading operations.
According to the Washington Post, here are the key provisions:
- New consumer protection bureau housed in the Federal Reserve with independent funding, an independent leader and near-total autonomy to write and enforce rules.
- New powers to seize and wind down large, failing financial firms and to oversee the $600-trillion derivatives market.
- In addition, a council of regulators, headed by the Treasury secretary, would monitor the financial landscape for potential systemic risks.
- Force banks to spin off only their riskiest derivatives trades, including particular forms of credit-default swaps, which are complex financial bets that exacerbated the financial crisis.
- Allow banks to hold onto certain derivatives trading related to interest rates, currency rates, gold and silver. They also would be allowed to continue trading in derivatives in order to hedge against their own risks
- Derivatives operations that firms spin out of their federally-insured banks could still be retained in a separately-capitalized affiliate. In addition, firms would have two years to institute the new rules.
- Prohibit a banks from investing more than 3 percent of their capital in private equity or hedge funds.
Its clear that the new bill will not force financial firms to completely abandon their energy trading and commodities businesses as was the implication of the original Volker Bill. There will still be alternatives if a bank wishes to engage in energy and commodity trading, either through affiliated businesses or via limited investment in hedge funds.
However, as we see more and more with these mega-bills (like health care legislation), nobody, even those that write the legislation, ultimately know what’s in the bill that they are voting for; evidenced by one by of the bill’s chief architects, Connecticut Senator Chris Dodd, noting, “No one will know until this is actually in place how it works…”. Terrific.