The following summarizes sections of the Restoring American Financial Stability Act of 2010, a bill introduced by Senate Banking Committee Chairman Christopher Dodd (D-Conn.). Among other things, the bill would:

  • transfer to the Federal Deposit Insurance Corporation (FDIC) the jurisdiction to regulate state banks and thrifts of all sizes and bank holding companies of state banks with assets below $50 billion.
  • allow the Office of the Comptroller of the Currency (OCC) to regulate national banks and federal thrifts of all sizes and the holding companies of national banks and federal thrifts with assets below $50 billion. The
  • Office of Thrift Savings would be eliminated, and existing thrifts will be grandfathered in, but there would be no new charters for federal thrifts.
  • cut back the jurisdiction of the Federal Reserve, which would regulate bank and thrift holding companies with assets of over $50 billion. The bill also requires that the president of the New York Reserve Bank be appointed by the President, with the advice and consent of the Senate.
  • preserve the dual banking system, leaving in place the state banking system that governs most community banks. The state regulators would for the most part continue to share jurisdiction with the FDIC.
  • create a new independent Consumer Financial Protection Bureau that would have the sole job of protecting American consumers from unfair, deceptive and abusive financial products and practices. The Bureau would be led by an independent director appointed by the President and confirmed by the Senate, and would have a dedicated budget paid by the Federal Reserve Board. The Bureau would write rules for consumer protections governing all entities—banks and non-banks—offering consumer financial services or products, and would have authority to examine and enforce regulations for banks and credit unions with assets of over $10 billion, all mortgage-related businesses (lenders, servicers, mortgage brokers and foreclosure scam operators) and large non-bank financial companies, such as large payday lenders, debt collectors and consumer reporting agencies. Banks with assets of $10 billion or less would be examined by the appropriate bank regulator. The bill appears to consolidate consumer protection responsibilities currently handled by the OCC, Office of Thrift Supervision, FDIC, Federal Reserve, National Credit Union Administration and Federal Trade Commission.
  • create a new Financial Stability Oversight Council that would focus on identifying, monitoring and addressing systemic risks posed by large, complex financial firms as well as products and activities that spread risk across firms. It would make recommendations to regulators for increasingly stringent rules on companies that grow large and complex enough to pose a threat to the financial stability of the United States. The Council would be comprised of nine members including: Federal Reserve Board, Securities and Exchange Commission, Commodity Futures Trading Commission, OCC, FDIC, Federal Housing Finance Agency and the new Consumer Financial Protection Bureau. The Council would have the sole job of identifying and responding to emerging risks throughout the financial system. The Council would make recommendations to the Federal Reserve for increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity, with significant requirements on companies that pose risks to the financial system. The Council would be authorized to require, with a 2/3 vote, regulation of non-bank financial companies that would pose a risk to the financial stability of the United States if they failed to be regulated by the Federal Reserve. The Council would also be able to approve, with a 2/3 vote, a Federal Reserve decision to require a large, complex company to divest some of its holdings if it poses a grave threat to the financial stability of the United States—but only as a last resort.
  • require regulators to implement regulations for banks, their affiliates and bank holding companies, to prohibit proprietary trading, investment in and sponsorship of hedge funds and private equity funds, and to limit relationships with hedge funds and private equity funds. Non-bank financial institutions supervised by the Federal Reserve will also have restrictions on their proprietary trading and hedge fund and private equity investments. Regulations will be developed after a study by the Financial Stability Oversight Council and based on their recommendations.
  • require large, complex companies to periodically submit plans for their rapid and orderly shutdown should the company go under. Companies would be subject to higher capital requirements and restrictions on growth and activity, as well as divestment, if they fail to submit acceptable plans. Significant costs for failing to produce a credible plan create incentives for firms to rationalize structures or operations that cannot be unwound easily.
  • create an orderly liquidation mechanism for the FDIC to unwind failing systemically significant financial companies. Shareholders and unsecured creditors would bear losses and management would be removed. The Treasury, FDIC and the Federal Reserve would all agree under this procedure to put a company into the orderly liquidation process. A panel of three bankruptcy judges must convene and agree—within 24 hours—that a company is insolvent.
  • charge the largest financial firms $50 billion for an upfront fund, built up over time, that would be used if needed for any liquidation. The industry, not the taxpayers, would pay for liquidating large, interconnected financial companies. The bill also allows FDIC to borrow from the U.S. Treasury department only for working capital that it expects to be repaid from the assets of the company being liquidated. The government would be first in line for repayment.
  • amend the Federal Reserve’s 13(3) lender of last resort authority to allow system-wide support for healthy institutions or systemically important market utilities with sufficient collateral to protect taxpayers from loss during a major destabilizing event, but not to prop up individual institutions. The Board must begin reporting within seven days of extending loans, periodically thereafter, and disclose borrowers, collateral and amounts borrowed unless doing so would defeat the purpose of the support. Disclosure may be delayed 12 months if it would compromise the program or financial stability. To provide protection against bank runs, the FDIC can guarantee debt of solvent insured banks and thrifts and their holding companies only if they meet a series of serious checks: the Board and the Council determine that there is a threat to financial stability; the
  • Treasury Secretary approves terms and conditions and determines a cap on overall guarantee amounts; the President must activate an expedited process for congressional review of the amount and use of the guarantees; and fees are set to cover all expected costs and losses are recouped from users of the program.

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