There are three amendments to watch today before Sen. Harry Reid (D-Nev.) calls another vote to end debate of Sen. Chris Dodd’s (D-Conn.) financial regulatory reform bill.
The first is Sens. Jeff Merkley (D-Ore.) and Carl Levin’s (D-Mich.) bill strengthening the Volcker Rule, which would force banks to separate their commercial and investment banking functions by banning depository banks from trading with their own funds. The second is Sen. Maria Cantwell’s (D-Wash.) amendment closing a major loophole in Sen. Blanche Lincoln’s (D-Ark.) derivatives proposal. The final is Sen. Susan Collins’ (R-Maine) amendment requiring higher capital requirements for some financial firms.
I’ll turn to Mike Konczal, a Roosevelt Institute fellow, for an explanation of what Collins’ amendment does:
First off, this amendment makes it clear that bank holding companies follow capital rules that are at least as tough as those imposed on banks. This is the essence of the shadow banking problem: if you want to act like a bank you have to be regulated like a bank.
This amendment also makes clear that if you are engaged in riskier activities than a bank, you must hold more capital. Examples it gives of risky activities it mentions are “significant volumes of activity in derivatives, securitized products purchased and sold, financial guarantees purchased and sold, securities borrowing and lending, and repurchase agreements and reverse repurchase agreements.” You know, the things that caused the last crisis and could cause it all over again.
This amendment also implies, in conjunction with the last paragraph, that banks will need to hold more capital when it comes to scope of businesses. The more high-risk business lines that a bank has, including ones that we can’t even think of yet, the more capital it has to hold. It tells the regulators that, when they aren’t certain, to require more capital….
This is probably the real fight. “Yes we’ll hold more capital as long as massive amount of risky debt turned into ‘safe’ equity through the shenanigans of our financial engineers can count as that capital.” Do we need to do that all over again?
That last paragraph gets at how important these amendments are. The Merkley-Levin proposal — initially one the Obama administration supported — clearly reduces risk in the banking system. So does Collins’ amendment. And Cantwell’s provision needs to be in the final bill, to ensure that the derivatives language is not toothless. These aren’t fringe priorities. These aren’t window-dressing. These aren’t amendments to score political points. They are provisions to make sure the bill works — provisions that in the first place should not have been tabled to the last minute.
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