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Dodd Legislation May Strip Fed, FDIC of Power

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A review of Sen. Christopher Dodd’s (D-CT) “Restoring American Financial Stability Act of 2009” — legislation that mandates sweeping changes to the financial regulatory landscape in the US — raises many questions, according to a review by international law firm DLA Piper. Of greatest importance in the new legislation, DLA Piper said, was the proposal to strip power from the Federal Reserve and the Federal Deposit Insurance Corp. (FDIC), eliminate the independent existence of the Office of the Comptroller of the Currency and the Office of Thrift Supervision, and in their place, create a new agency, the Financial Institutions Regulatory Administration (FIRA). Not surprising, the affected agencies are fighting the proposal. It has also been viewed with a skeptical eye by Rep. Barney Frank (D-MA), chair of the House Financial Services Committee and others leadership in the House, whose support would be crucial to the legislation passing in both houses of Congress, DLA Piper said. The firm also wrote industry players large and small are also opposed to the move. Another proposal, the creation of the Agency for Financial Stability (AFS), further weakens the power of the Fed in favor of a new agency. The AFS would be responsible for managing systemic risk and its leadership would be comprised of Secretary of the Treasury, the chairs of the newly established FIRA and of the Consumer Financial Protection Agency (CFPA), and the chairs of the Securities and Exchange Commission (SEC), the FDIC and the Commodity Futures Trading Commission. “The potential consequences of such regulation by this new agency could be very broad-reaching and severe: not only will there be new prudential standards applicable to such firms, including contingent capital requirements — that is, contingent capital instruments that convert into equity if certain risk standards are not met by the firm in question — but new disclosure and reporting obligations would be mandated for these institutions,” the firm wrote. The firm added, “Additional constraints on acquisition activity and affiliate lending arrangements would also be imposed, and the firms in question may face the requirement of disposing of designated assets or business lines should they be deemed too large in their operations and posing too great a resultant risk to the overall financial sector.” Another proposal, the creation of a new insurance regulator, calls into question whether states should be stripped of their ability to independently regulate the insurance industry. A second issue the proposal raises is the impact insurance regulator would have on healthcare, particularly if Congress and the Obama Administration passes sweeping healthcare regulations. “As a practical and political matter, federal supervision of the “business of insurance,” once established, will not likely stop with casualty and life insurance alone,” the review said. The bill also calls for a number of securities-related regulation, including requiring asset-backed securitization originators to retain 10% of the total credit risk of assets securitized as a means to encourage prudent lending. The review notes that Dodd has acknowledged the bill will undergo extensive revisions before it pass. “[N]o one is more aware than Sen. Dodd that his proposed legislation will need to be revised in the course of the legislative process,” the report said. “In the remaining 13 months of this Congress, the scope and concepts set forth in this proposal will evolve to reflect numerous efforts at compromise and conciliation with a plethora of competing House and Senate voices. Yet the senator has chosen to start the bargaining process from the broadest possible position.” Write to Austin Kilgore.

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