The House passed legislation Friday governing Wall Street, the biggest overhaul of laws covering banks and other financial institutions since the New Deal. Senate action is expected early next year.
Some questions and answers on the bill:
Who does it affect?
Financial institutions, both banks and nonbanks; homeowners, borrowers and credit card holders; insurance companies; hedge funds; traders in complex derivatives; and securities rating companies.
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How would it avoid another Wall Street crisis?
It creates a Financial Services Oversight Council made up of the Treasury secretary, the Federal Reserve chairman and heads of regulatory agencies. The council would monitor the financial markets to watch for potential threats to financial system. It would identify firms and activities that should be subject to heightened standards, including requirements that they place more money in their reserves. Companies would have to plan for their own demise, detailing how they would be dismantled if they fail. The government could dismantle even healthy firms if they are considered a grave risk to the economy.
Who would pay for a failing firm?
Failing banks are dissolved now by the Federal Deposit Insurance Corp. The legislation proposes that the costs of large nonbank institutions that fail first be paid for by shareholders and creditors. Even secured creditors would have to take a hit, losing up to 10 percent of their security. If the failure still has damaging financial repercussions, the FDIC would tap a special $150 billion fund paid for by large institutions with $50 billion in assets or more, or hedge funds with at least $10 billion in assets.
What are consumers likely to see?
The legislation creates a Consumer Finance Protection Agency that would oversee consumer lending — mortgages, credit cards, payday loans and terms on savings accounts. It would take consumer regulation and enforcement powers away from bank regulators. Under current law, states cannot supersede federal consumer laws, but the legislation would permit states in some instances to impose tougher consumer laws on financial institutions. Banks could escape state laws by claiming they “materially” impair the business of banking. Several industries would be exempt from CFPA oversight, including retailers, auto dealers, lawyers and accountants.
What else does it do?
It brings the unregulated $600 trillion derivatives market under government oversight. Derivatives are complex financial instruments, such as credit default swaps, blamed for accelerating the Wall Street panic last year. Some companies that use them to hedge against risk from new requirements in the overhaul legislation would get exceptions. So would companies considered too small to pose a risk to the financial system. The Obama administration did not want the exceptions and consumer advocates say they give Wall Street a break. Hedge funds, which operated in shadow financial markets, would have to be registered with the government.
What about those executive salaries?
Company shareholders would get a nonbinding vote on the pay of top executives. Federal banking regulators would have to approve compensation practices, though not actual pay, at banks and bank holding companies.