Summary of Bank Regulation Bill in Plain English

A) Oversight:

Banks which are deemed so big or interconnected that their failures could present systemic risks for the overall economy will be monitored by a ten member council.

B) Credit Rating Agencies:

Agencies such as Moody’s Corp, Standard & Poor’s and Fitch Ratings could be sued if they “recklessly” fail to review key information in establishing a rating.

C) Capital Requirements:

The term “tier one capital” is often referred to in the news, but never defined. It is the core measure of a bank’s financial strength from a regulator’s point of view. It consists primarily of common stock and retained earnings of a bank. The Bill requires large banks to increase the amount of capital that they hold in reserves against possible loan losses. This will of course limit banks’ leverage and potential earnings. This provision however does not become effective for the first five years.

D) Limitations on Derivatives:

After a great deal of bargaining into the wee hours of the morning, a compromise was struck whereby banks get to retain derivative trading in house with respect to interest rates, foreign exchanges, gold and silver. Other types of derivative trades would have to be spun off to a securities broker-dealer division of the bank, separate and distinct from their traditional deposit-taking divisions. FDIC insurance will continue to protect the deposit-taking entity of banks, but it would not protect the broker-dealer affiliates created for the other derivatives trades. Government agencies will have new authority to regulate these trades, which heretofore have been largely unregulated. According to the Office of the Comptroller of the Currency, five banks control 97% of the total derivatives market, and 92% of their derivative trades relate to interest rate or foreign exchange. Therefore, the Bill will have little real impact on derivative trading, which was designed to be a monumental linchpin.

E) Volker Rule:

Paul Volker, the former Federal Reserve chairman, sought to prevent banks from engaging in any proprietary trading, or bets with its own money, including investments made to hedge funds and private equity funds. Bloomberg reports that Goldman Sachs executives estimate that 10% of the firm’s annual revenues come from proprietary trading. The final version of the Bill allows banks to invest in hedge funds and private equity, however, they cannot invest more than 3% of a fund’s equity and only up to 3% of the bank’s tier 1 capital can be invested into hedge funds or private equity. In addition, the Bill prevents firms which underwrite asset-backed securities from placing bets against the investment.

F) Limitations/ Costs/ Results:

The government, which took over Fannie Mae and Freddie Mac in 2008 after they suffered huge loan losses due to the housing crash, has already spent $ 145,000 billion and has pledged to cover unlimited Fannie and Freddie losses through 2012. The Bill does not address these loans at all. Even though auto dealers assemble loans for millions of car buyers, they will continue to be regulated by states or the Federal Trade Commission. They will not fall within the purview of the new consumer bureau.

Banks with assets of more than $50 billion and hedge funds with more than $10 billion in assets will be assessed a fee which is deemed to raise $19 billion over 10 years. Lending will continue to be more restricted and banks will pass on the additional fees to their customers. Wealth may or may not trickle down, but costs and regulations almost always do.

Respectfully submitted,
Greg Gann

The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.