US financial reforms likely to face Republican roadblocks

WASHINGTON – The new financial reform Bill introduced in the US Senate will likely be approved at the committee level next week, but its shape could change substantially once it comes before the full Senate and winning Republican support comes into play.

The 1,336-page measure leaves major issues still to be worked out, likely on the Senate floor and beyond, including regulating over-the-counter derivatives, applying the “Volcker rule” on curbing risky trading by banks, and imposing stricter bank capital and liquidity standards.

The Bill, introduced by Senate banking committee chairman Christopher Dodd, a Democrat, faces a reasonably smooth road at the committee level, where Democrats hold enough votes to pass the measure. But once it advances to the full Senate, the arithmetic changes, with Democrats only controlling 59 of the 60 votes that will be needed to overcome procedural roadblocks. “We expect the Bill to undergo significant changes over the next month,” said Brian Gardner, an analyst at investment firm Keefe, Bruyette Woods.

Mr Dodd said Congress needs to fast-track reform, despite Republican pleas to slow down. He said Congress should not adjourn for a two-week recess on March 26th without acting.

Mr Dodd, who is not seeking re-election in November, released his Bill on Monday after marathon talks with Republicans failed to produce a bipartisan deal on proposals for the most sweeping overhaul of bank and capital market oversight since the 1930s.

Mr Dodd sounded a note of optimism on the Bill yesterday, but acknowledged that there is work yet to be done. “We’ve made a lot of progress, the Bill reflects that. Some Republicans have indicated we’re 80 or 90 per cent agreed.”

The Bill repeats language first proposed in November to crack down on the $450 trillion over-the-counter derivatives market. Risky derivatives instruments such as credit default swaps, a type of insurance used by bondholders, have been blamed for helping to cause the financial crisis. A compromise proposal is expected to replace what is in the Bill now.

The Bill also proposes enforcing the “Volcker rule”, named after White House economic adviser Paul Volcker. It would curb proprietary trading at banks and force them out of the hedge fund business. The Bill also calls for stricter bank capital and liquidity standards, but they are not clearly defined. The details will depend on the efforts of supervisors tasked with developing new standards. – (Reuters)