The financial reforms approved by the U.S. Senate last week will help liquidate large and complex financial institutions in an orderly way, improve market discipline and protect taxpayers and consumers, said Sheila Bair, chairman of the Federal Deposit Insurance Corp. (FDIC).
“The responsibility now shifts to regulators to implement this law in a manner that is aligned with its principles,” she said. “To this end, the FDIC will move swiftly and deliberately through the various rulemakings and studies required under the bill.”
The new regulations will allow the FDIC to use receivership powers to close and liquidate firms.
They also create the Systemic Risk Council, an oversight agency that will identify and address risks and close gaps in financial regulations. The newly created Consumer Financial Protection Bureau will set consumer protection rules for banks and non-banking financial firms, Bair said.
New capital requirements have been extended to bank holding companies, which will apply many of the same rules that banks must adhere to.
“For the first time, bank holding companies will be subject to the same standards as insured banks for Tier 1 capital,” she said. “Excess leverage and thin capital cushions were primary drivers of the financial crisis, which resulted in severe, sudden contractions in credit and led to the loss of millions of jobs. This provision will bring stability to the financial system, allowing it to support real, sustainable, long-term growth in the real economy.”
Dean Baker, co-director of the Center for Economic and Policy Research, said the new federal regulations will not greatly affect the way the nation’s largest banks and Wall Street do business.
“The rules on derivative trading will still allow the bulk of derivatives to be traded directly out of banks rather than separately capitalized divisions of the holding company,” he said. “The Volcker rule was substantially weakened by a provision that will still allow banks to risk substantial sums in proprietary trading.
"More importantly, there is probably no economist who believes that this bill will end the risks of too-big-to-fail financial institutions. The six largest banks will still enjoy the enormous implicit subsidy that results from the expectation that the federal government will bail them out in the event of a crisis.”
Bair disagreed, and said that the new regulations will go a long way toward preventing another financial crisis and protecting its citizens if one were to occur.
“No set of laws, no matter how enlightened, can forestall the emergence of a new financial crisis somewhere down the road. It is part of the nature of financial markets,” she said.
“However, what this law will do is help limit the incentive and ability for financial institutions to take risks that put our economy at risk, it will bring market discipline back to investing, and it will give regulators the tools to contain the fallout from financial failures so that we will never have to resort to a taxpayer bailout again.”