Republicans Release Own Financial Services Regulation Proposal

April 28, 2010

Senate Republicans have proposed an alternative to Democrats’ financial regulation legislation, according to a document obtained by Reuters on Tuesday. Below are their key proposals.

ORDERLY LIQUIDATION

No resolution fund. Three-part procedure for triggering new a process to dismantle large financial firms in distress.

1) Federal Reserve Board and Federal Deposit Insurance Corp board must make recommendation on whether FDIC should be appointed receiver for troubled firm.

2) Treasury Secretary and U.S. president must determine that resolving firm would safeguard U.S. financial stability.

3) Treasury Secretary would file petition in court for an order authorizing secretary to appoint FDIC as receiver.

FDIC would have to decide to resolve firm by liquidation or winding down company, or by transferring company’s assets and liabilities to a bridge bank and liquidating remaining assets.

The FDIC has flexibility to advance funds to creditors, but would have to recoup any amount the creditor received in excess of what it would have received in bankruptcy.

FDIC banned from making equity investments in firm without Congressional approval.

FEDERAL RESERVE MEASURES

Restricts Fed’s emergency lending authority to providing liquidity to solvent companies in short-term crises. Fed board, Treasury Secretary would have to approve measure. Fed actions accountable to Congress, public.

Would require Fed to draw clearer line between monetary and fiscal policy to preserve independence of Fed and ensure Fed does not choose winners and losers through credit allocation.

New York Fed president would become a political appointee. He is currently picked by the bank’s board of directors subject to approval by the Fed Board of Governors in Washington.

CONSUMER PROTECTIONS

Creates a Council for Consumer Financial Protection made up of FDIC chairman, Comptroller of the Currency and Fed chairman. Council can write rules for consumer products and has powers to supervise and enforce rules for largest financial firms.

Council has backup enforcement authority over regional banks and credit unions, but small community banks and thrifts fall under purview of their respective bank regulator.

National bank regulators continue to preempt state laws.

SYSTEMIC RISK

Establishes a Treasury-led council of financial regulators to monitor financial stability and systemic risk, much like a similar proposal being made by Democrats.

The council would undertake stress tests of the financial system, ordering firms that fail to take remedial action. It would also rule on new capital, liquidity and leverage standards and promote cooperation among regulators.

OVER-THE-COUNTER DERIVATIVES

Requires clearing of some over-the-counter swaps, based on criteria established by the Commodity Futures Trading Commission and the Securities and Exchange Commission, but would not force trading of swaps onto exchanges.

Entities that use swaps to hedge risks would be exempt from clearing requirements. Major swaps users would have to register with regulators. All swaps trades would be publicly reported.

SEC REORGANIZATION

Reorganizes internal structure of SEC by creating several new agency divisions.

SARBANES-OXLEY

Immediately exempts corporations with less than $150 million in publicly floated equity from complying with Section 404 of 2002’s post-Enron Sarbanes-Oxley reforms. The law required publicly held companies to get external reviews of their internal financial controls.

FANNIE MAE AND FREDDIE MAC

Limits further bailouts of Fannie and Freddie to $200 billion per institution. Requires the mortgage finance giants to reduce their portfolio holdings by 10 percent of the prior year’s holdings.

President will be required to submit a plan to reform the mortgage finance giants to Congress no later than 6 months after the law is enacted.

Inspector general appointed to investigate Treasury Department’s decisions made regarding the conservatorships of Fannie and Freddie.

INSURANCE

Similar to Democratic bill. Establishes Office of National Insurance within Treasury Department to monitor and study the insurance industry, but not regulate it.

Insurers are presently regulated by state-level authorities, not the federal government. The new office would also “coordinate international insurance regulation.”

The summary says the Republican alternative also “streamlines the regulation of surplus lines and reinsurance.”

(Reporting by Ann Saphir, Rachelle Younglai, Kevin Drawbaugh, Kim Dixon; editing by Andre Grenon

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