America is inching closer to a comprehensive bank reform package.

PHILADELPHIA - It's been a long, slow, depressing process, but the wheels of the US legislature are gradually grinding towards a final, comprehensive banking reform bill with the encouraging news that top senators are close to a deal.

Late last year the House of Representatives passed its bill, and all eyes have been on the senate to come up with its version so that the two arms of American lawmaking can begin wrestling over a final bill that will then go to a vote, and, insha'Allah, become law some time this year.

There have been a number of stumbling blocks in the process of developing a law to reform banking and financial services; however, there is reason to hope this process is nearing its end, and that Congress may have something to vote on by mid-year. It's important that this happen soon, because in November there'll be a rash of elections - 36 out of 100 senators, the governors of 36 out of 50 states and all 435 members of the House of Representatives will face re-election - which will completely distract the American ruling class for several months, shrinking the chances of any laws being made to slightly less than zero.

So where do things stand with the Senate bill right now? The original bill proposed by Senator Christopher Dodd, the chairman of the Senate Banking Committee featured the following major elements, many of which pose major problems.

1. A consumer financial protection agency

The bill proposed the creation of an independent Consumer Financial Protection Agency which would be tasked with protecting consumers from fraud and abuse by, and ensuring they get clear information from credit card companies, mortgage brokers, banks and other financial services institutions.

The agency would have had wide-ranging powers to develop, implement and monitor consumer protection rules, and would have consolidated various consumer protection responsibilities that are dispersed among the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, the National Credit Union Administration, and the Federal Trade Commission.

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This proposal proved to be a major sticking point in negotiations, with a number of Republicans feeling very strongly that this was not an option as it would further freeze up credit markets and create a lot of new bureaucracy but little real protection for consumers.

This is also the point that just may be close to resolution. The Wall Street Journal reported on Tuesday that it looks likely that senators will agree to create a new consumer protection division within the Federal Reserve, rather than creating an independent agency. If true, this would mean that a bill might be tabled within a few days.

Unfortunately, this will be quite a hard sell. Many lawmakers are in a pretty anti-Fed mood these days, along with many Americans, and will be unwilling to further extend the Fed's consumer protection powers given what's perceived as the Fed's poor record in using those powers it already has. Furthermore, President Barack Obama has expressed his commitment to the creation of an independent agency, and he won't be thrilled with a watered down ‘division'.

2. Government empowered to break up risky institutions

This is another important, and contentious, piece of the proposed bill. Basically, the bill would give regulators powers to break up financial services institutions that are judged to be posing a systemic risk.

According to the Senate Banking Committee, the bill "will discourage companies from getting too large by imposing burdens on them as they grow and give regulators the authority to break up large, complex companies if they pose a threat to the financial stability of the United States".

Obviously, there are many who oppose this piece of the legislation, and it's not yet clear what kinds of compromises have been made in closed door sessions, although it's hoped that details will be available soon.

3. Centralise banking regulation

This aspect of the bill proposes creating a kind of banking super-regulator, which would combine the oversight functions of the OCC and the OTS, the FDIC and the Fed. The goal here would be to prevent "regulatory shopping", the process by which companies strategically choose to incorporate under a particular regulatory regime to avoid restrictions they want to avoid.

Unsurprisingly, this is another bone of contention, as financial services lobbyists, lawmakers and the various regulators themselves all seek to avoid such massive overhaul.

4. Increased oversight of derivatives trading, hedge funds and credit ratings agencies

Derivatives emerged as a kind of bête noir in the financial crisis of 2007, with these little-understood and largely unregulated instruments seen as a prime cause of the meltdown. This part of the bill calls for regulation of derivatives markets by the Securities and Exchange Commission and the Commodity Futures Trading Commission. This is a complex area, and one that will challenge lawmaker ingenuity; one of the bills core proposals is a central clearinghouse for derivatives trades.

In a similar vein, hedge funds and credit ratings agencies like Moody's can also look forward to more regulatory oversight.

5. Executive compensation issues

Everyone's favorite topic - the obscene amounts earned by bankers - attracts attention from the bill, which proposes giving shareholders a greater say over pay and creating greater accountability among executives who must justify their wages.

Where to?

If the Senate does manage to table something this week, we'll be one step closer to banking reform. However, it's only one small step, and there are more battles to come. Watch this space.

Write to Felicity Duncan: felicity@moneyweb.co.za or follow her on Twitter at http://twitter.com/FelicityDuncan

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banks It is all too late: The Fed, who created the financial mess does not give a hoot about consumers as the shareholders of the Fed are the Wall Street banks. They are now going to protect the consumer? Hahahaha. Wall Street pays 5 Billion US$/per . .more year to US Congress for "political contributions" and there are 6 bank lobbyists for every Congressman. Consider US politicians bought. Nothing is going to change. . .less by Troy ounce on March 03 2010, 05:37 Find this comment inappropriate? Report it

SHOULD HAVE BEEN A BANKER I think i chose the wrong career and should have become a banker and amde millions! All from stupid clients and government policies! by BART on March 03 2010, 09:15 Find this comment inappropriate? Report it

What a wonderful world More laws, more paper, more bureaucrats, more lawers, more money spent and little gained. Just on a mathematical basis we'll all one day drown in a deluge of gobbleygook. by Dave on March 03 2010, 12:44 Find this comment inappropriate? Report it

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