The rules of Wall Street are being amended to better regulate the US financial System. Congress provided a rewrite of the rules that was submitted to President Obama on July 4th. After a 20 hour session of the House and Senate negotiators, a bill has been approved that envisages a ban on the bank’s proprietary trading and provides more oversight to the US financial market. The House and Senate are all set to vote on this measure and congressmen have conveyed that no further amendments will be added to the bill. Some of the major provisions that law makers in Washington agreed to in the Wall Street rules include the following:
Named after Paul Volcker, former Chairman of The Federal Reserve, the rule bans banks from proprietary trading. Banks can invest in private equity and hedge funds but are capped at 3% of the fund’s capital. For Tier 1 capital, the investment can be more than 3%. This is an amended provision from the bill introduced in May, when banks were completely barred from investing in hedge funds and private equities. This change was made in response to the Massachusetts Republican, Senator Scott Brown, whose concerns were that the ban would torment Boston-based State Street Corp. Brown along with three other republicans was the first to vote for the Senate bill, breaking party ranks. Proprietary trading is now defined as a principle for trading account of banks and financial institutions that are supervised by the Fed for purchase, sale or any other transactions. Any bans on proprietary trading actually reduce profits. Goldman Sachs says that 10 percent of its annual revenue comes from proprietary trading.
In a last minute deal, lawmakers for the first time introduced a regulatory structure for $615 trillion in the counter derivatives market. This provision will push banks to use some of their swap trading into subsidiaries. This will reduce the taxpayers’ risk by barring their trades from institutions that receive federal benefits. Senator Blanche Lincoln, chairman of the Senate Agriculture Committee actually introduced the original proposal to ban all swaps-trading by commercial banks. But, later there were negotiations among all parties, secretaries and directors whereby it was agreed that banks can maintain their trading operations until and unless they are used to trade interest rates or hedge risk or foreign exchange swaps. Now, federally insured banks will get two years time to clear un-cleared default swaps to separate capitalized subsidiary.
A protection bureau at the Federal Reserve to police banks and financial services against abuse from credit-card and mortgage-lending, will be created. This plan is in opposition to the opinion of Republicans and financial industries. Obama proposed a stand-alone consumer agency to prevent financial crisis. Travis Plunkett, the Director at the Consumer Federation of America, said “It’s an agency with considerable authority to protect consumers from abusive financial practices, which is a landmark achievement.”
This bureau will be an independent authority though it will be housed at the Fed. It will be responsible to write consumer protection rules for banks and firms that offer financial services and will be headed by a director appointed by the president. It will enforce rules for firms with more than $10 billion in assets.
Credit, Debit cards
The Federal Reserve will have the authority to limit swipe fees during debit card transactions. Now retailers can refuse credit cards for less than $10 purchases. U.S. merchants pay interchange fees in Visa and MasterCard debit cards. Last year, the fees amounted to $19.7 billion and accounted to 1.63 percent on an average for each sale.
It is meant to establish financial stability. The ‘Oversight Council’ will monitor large Wall Street firms and other real players and would respond to system risks. It will be headed by the treasury department. With 2/3 of the vote, the council can leverage capital requirements on lenders and bring hedge funds and broker dealers under the Fed’s authority. It will also have the power to force companies to divest their holdings if they become a threat for the financial stability of the country.
Bank Capital Rules
Introduced by Senator Susan Collins, the bill will force some banks to show their capital. It is going to show its impact on ‘Trust Preferred Securities’ (TruPS). Banks with $15 billion in assets will find 5 years time to replace TruPS with common stock and other securities. It is found that smaller lenders sold $45 billion in TruPS out of the $150 billion issued by US banks. According to Richard Bove, analyst at Rochdale Securities, smaller banks like McLean, Capital One Financial Corp. & Buffalo and M&T Bank Corp would be hurt the most as they heavily rely on TruPS.
The Federal Reserve
The Federal Reserve will possess a broad supervisory scope and will bring transparency to its 96 year history. Headed by Chairman Ben S. Bernanke, a new Financial Stability Oversight Council will be created that will deputize the Fed to implement tough standards for disclosure, capital and liquidity. The rules will be the same for all financial companies and banks that pose a financial system risk. The Fed’s bank supervision was earlier curtailed but now the bill would allow the Fed to keep supervising banks like Goldman Sachs, Bank of America and Central Virginia Bank shares Inc, which have assets around $471 million.
There are also other provisions under this bill that enforces amendments in segments such as Credit Raters, Private Equity, Failed Firms, Risk Retention, Fiduciary Duty and the Insurance Industry. The changes have helped to regulate discrepancies in the US financial system with concessions granted to taxpayers and banks.
This article was submitted by Rohit Arora, co-founder of Biz2Credit. Biz2Credit is a small business marketplace that connects entrepreneurs with financing options and advice to grow their business. Send all questions to