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Dodd bill aims to simplify the patchwork of bank regulation

Sen. Christopher Dodd introduced a bill in the Senate Banking Committee Tuesday aimed at tightening bank regulation. Critics of the current system say regulators are too cozy with bankers now.

By Staff writer / November 10, 2009

Senate Banking Committee Chairman Sen. Christopher Dodd (D) of Connecticut, announced a financial reform package, Tuesday, during a news conference on Capitol Hill in Washington.

Charles Dharapak/AP

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Key senators weighed in Tuesday on how to make the US banking system safe for Main Street.

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A plan unveiled by Sen. Christopher Dodd (D) of Connecticut would simplify what is now a patchwork of bank regulators. It would strengthen oversight of risky activities such as the market for so-called derivative securities. And if a large bank gets into trouble, the plan calls for a controlled shut-down – not a taxpayer-funded bailout.

Financial experts widely agree that a regulatory overhaul is urgently needed. Senator Dodd introduced his plan in the Senate Banking Committee, which he chairs. The White House has made its own proposals, and the House Financial Services Committee has its own plan.

The question is whether any of the proposals will tame problems that helped create the deepest recession since the 1930s. These problems spanned from risky mortgage products to a failed regulatory climate created by both Republicans and Democrats in Washington.

Bankers have political clout

It’s very tricky to design fixes that strike a balance between encouraging marketplace innovation and guarding against credit bubbles and busts that have surfaced with periodic regulatory. The job is made still more difficult by the strong lobbying clout of the the banking industry.

The risk is that, in the wake of extraordinary taxpayer-backed efforts to rescue banks and the economy, not enough will be done to keep America from getting into similar trouble down the road.

“We have not changed the financial regulatory framework in a substantive way so as to limit excessive risk taking,” Simon Johnson, a finance expert at the Massachusetts Institute of Technology, told a congressional hearing last month. “The proposals currently proceeding through Congress are unlikely to make a significant difference.”

He said the US economy retains significant strengths in entrepreneurship and innovation. But Mr. Johnson said that skewed incentives have allowed bankers to reap big profits for activities that may do little for the private sector overall. And when those activities become downright unprofitable – as at some big firms in the recent crisis – the losses are often carried primarily by taxpayers.

Sen. Dodd's key proposals

Here are key elements of Dodd's plan:

• Confront a “too big to fail” mentality among banks. The crisis showed that some institutions are so important to the system that regulators wouldn’t allow their collapse – due to worries about the ripple effects. The Senate plan, like the House plan, tries to create a middle ground in which giant firms could face a bankruptcy-style shutdown, but in a controlled way that doesn’t cause panic. And it establishes some incentives for banks not to get too large. It remains to be seen if this will work.