Financial reform bill 101: How it boosts Wall Street oversight

The financial reform bill passed Thursday by the Senate would create a council of financial watchmen who would act as an early warning system for market trouble.

By , Staff writer

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    Traders work on the floor of the New York Stock Exchange Friday. Passed by the Senate Thursday, the financial reform bill would create a Financial Services Oversight Council that would act as an early warning system for market trouble.


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Washington didn’t see the last financial meltdown coming. That’s something most Democrats and Republicans can agree upon. The financial reform bill that passed the Senate Thursday aims to fix that by establishing a Financial Services Oversight Council (FSOC) – a sort of bureaucratic early warning system charged with scanning the horizon of the markets for trouble.

This would not be another entirely new government body, like the bill’s Consumer Protection Agency. Instead it would be a group of existing officials who would meet periodically to judge the prospects of the US experiencing another loan apocalypse.

The group’s designated chairman, under the bill, would be the secretary of the Treasury.

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Other members would include the chairman of the Board of Governors of the Federal Reserve, the Comptroller of the Currency, the chairman of the Commodity Futures Trading Commission, and so on. The president would get to appoint one independent member with insurance expertise for a six-year term.

And what would this all-star team of officials do? According to the Senate bill’s language, their duties would include monitoring the financial services marketplace for threats, and identifying regulation gaps that could pose problems.

They could also, by a two-thirds vote, “require supervision by the Board of Governors [of the Fed] for nonbank financial companies that may pose risks to the financial stability of the United States in the event of their material financial distress or failure,” according to the bill.

That last one could be a big deal, despite its eye-glazing wording. In other words, the council could drag, say, big insurance firms like AIG that otherwise would not be subject to the steely glare of Ben Bernanke into his sphere of influence. If that ever happens, the firms in question might not be too pleased.

The council could do the same thing to important financial market payment and clearing activities. It could also recommend to the Fed changes in standards for things such as capital and liquidity for bank holding companies. Since the Fed chairman would be a member of the FSOC, presumably these recommendations would be accepted.

Finally, this new oversight board also would in essence have the power to issue “cease and desist” orders to firms the Fed thinks are risks. If the Fed’s Board of Governors determines that a big bank holding company or nonbank financial institution that’s under Fed regulation is “a grave threat to the financial stability of the United States,” then the oversight council can vote to require the firm to stop whatever it is doing that the Fed thinks is risky. If that’s not enough, the FSOC can even vote to break up such a firm, by forcing it to sell or transfer some assets.

The House version of the financial overhaul bill establishes an oversight council along similar lines. The biggest difference might be that the House would make up its council with a slightly different mix of bureaucrats. In any case, the fact that this council is in both bills virtually ensures that it will be in any final financial regulation bill that President Obama signs into law.

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