For 43 members of Congress, it's time to work out the final details of the biggest overhaul of financial regulation since the 1930s.
Their task, starting Tuesday, is to resolve differences between the mammoth financial reform bills passed by the House and Senate – both aimed at preventing another financial crisis.
Although the basic outlines of the two bills are similar, some major issues remain in play as the congressional conferees try to get a final bill to President Obama before July 4.
Both bills would empower top federal regulators to keep closer watch on risks in the financial system – beyond just traditional banks. When a large financial firm is failing, the bills would also establish a middle option between a bailout, such as occurred in 2008 with insurance giant AIG, and standing back while a firm fails (like investment bank Lehman Brothers), potentially destabilizing financial markets.
Here are some key areas to watch in the days ahead:
The "Volcker rule" on banks. The Senate bill contains a provision designed to ban traditional banks from engaging in proprietary trading of investments. Named for former Federal Reserve Chairman Paul Volcker, the rule is designed to limit the size and risks of large banks – which now generally see investment trading as a major source of profits.
The measure appears to have gained the momentum needed to remain in the final bill, says Paul Miller and other industry analysts at the investment firm FBR Capital Markets in Arlington, Va. It could even be strengthened using language proposed by two senators who are not members of the conference committee itself, Carl Levin (D) of Michigan and Jeff Merkley (D) of Oregon.
"The Merkley/Levin amendment would remove some of the ability of regulators to weaken the rule" and speed implementation from as long as six years to three years, Mr. Miller and his colleagues wrote in a report Tuesday.
Derivatives regulation. The Senate bill is tougher than the House bill in regulating banks' exposure to the risky investments known as derivatives. These contracts include many flavors of "swaps," which amount to bets that a credit event (such as a boost in interest rates) will or won't happen. The language backed by Sen. Blanche Lincoln (D) of Arkansas calls for banks to spin off their so-called swaps desks. Large banks hope to retain that lucrative activity, albeit with closer supervision of their risk under the new reforms.
One possible compromise: Banks could be allowed to retain this business, but be required to raise separate capital for the operations, to minimize the risk to their traditional banking business.
Credit rating agencies. A provision backed by Sen. Al Franken (D) of Minnesota would require that the first rating on a security (such as a mortgage-backed bond) be conducted by a rating agency selected by an independent panel within the Securities and Exchange Commission. It's unclear if this item will remain in the final bill. In the committee meeting on Tuesday, Rep. Brad Sherman (D) of California warned that if the firms issuing securities continue to select rating agencies, "we will set up another circumstance where they give triple-A ratings to bad bonds."
Debit card fees. The Senate bill includes a mandate that fees to retailers who process debit-card transactions be "reasonable" and proportional to the processing costs at banks, based on review by the Federal Reserve. The analysts at FBR Capital Markets predict that such an "interchange provision" will make it into the final bill – possibly with some modification.
FDIC limits. The House conferees support permanently increasing the Federal Deposit Insurance Corporation's cap on the size bank account that is federally insured, making it $250,000 retroactive to Jan. 1, 2008. (The former limit was $100,000.) On Tuesday, the conferees rejected a Republican-led bid to leave out the retroactive timing. That timing aids depositors of IndyMac, a bank that failed during the financial crisis.