Dodd’s Financial Regulatory Reforms Proposal Fails to Deliver the Punch

The recently proposed financial and bank regulatory reforms by Senate Banking Committee Chairman Chris Dodd has been received with mixed reactions so far. The reforms bill aims to define new regulatory responsibilities and processes for various financial regulatory bodies including the Federal Reserve.

Under the proposed reforms, the Fed will get new ranks of regulators who will maintain a constant watch to ensure that there are no imminent risks to the financial system. The Federal Reserve will also supervise the larger financial firms in the country. However, the reforms in its present form fail to empower the regulatory bodies to formulate and implement effective and potentially unpopular ideas to safeguard the economy.

The general feeling that bank regulators are too nit picky continues to grow strong in face of pessimistic mind set brought about by high unemployment levels. The Treasury Secretary has asked bank supervisors to retain optimism.

According to Richard Carnell, former Treasury officer, there is little foresight in the regulatory framework and the reforms suggested are hurried and constrained.

The risk evaluations and assessments of banks done in the past were not carried out adequately leading to the recent collapse of the banking system. Easy bank capital requirements had caused big banks to expand even further over the past decade before the downfall. While the terms were eased for banks since 1996, the FDIC bore the brunt of insurance premium holidays accorded to banks. The FDIC recently posted its highest ever deficit.

Not many changes have been proposed in Federal Bank regulations because of massive opposition from banks and the Fed itself. Dodd’s proposal will close down the Treasury’s Office of Thrift Supervision and disallow choosing of regulators by financial entities. Bailouts will be discouraged as per the provisions of the bill and unsound institutions will be forced to declare bankruptcy in the worst case.

To recall, Treasury’s OTS division was the regulatory body overseeing the AIG up to the bailout, and did not do much to prevent collapse of Washington Mutual thrifts and IndyMac.

The bill proposes to bring federal banking regulation under one umbrella- the Financial Institutions Regulatory Administration. Although the bill is a mellowed down version of Dodd’s earlier proposals, he is still pushing for quick and effective solutions. An earlier effort was made during the Clinton regime to fuse the four regulatory bodies into one for easier management, accountability and cost effectiveness, but it was shot down by the then Federal Reserve chief Alan Greenspan.

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