Impact on your financial institutionThe plan also would eliminate the Office of Thrift Supervision and force existing thrifts or savings and loan institutions to become national banks under the jurisdiction of the Office of the Comptroller of the Currency. So if you are a customer of a thrift, your institution would either close or be required to become a bank.
Other financial firms would also be affected by more strict requirements for capital and liquidity, and beefed-up oversight generally. The goal is to prevent a repeat of the recent crisis, when institution after institution threatened to collapse.
"For consumers, there's confidence that the government has acted, has plugged holes," says Scott Talbott, senior vice president at the Financial Services Roundtable. "We're never going to prevent another economic slump but we can minimize the impact."
It's possible that smaller banks will have trouble meeting the increased regulatory and disclosure requirements and close their doors or seek a merger.
"You'll see some consolidation pressures," Min says. "The cost of compliance may be higher."
Fewer choices possibleIndeed, the banking industry has come out against the idea of creating a consumer-oriented agency simply to oversee products. It could actually harm the system to have one regulator looking at the soundness of the institution and another focusing on the products offered to consumers, Talbott says.
Moreover, if banks are forced to standardize products, the result will be fewer choices for customers. Instead of offering perks to good customers, such as free checking, they would revert to the lowest common denominator, says Mark Tenhundfeld, a senior vice president at the American Bankers Association.
"Banks may end up with fewer products and having to pay more for them," Tenhundfeld says. "These costs are going to have to be passed on to the consumer. While there is this perception that the consumer is going to benefit from this additional layer of oversight, in practice we're not at all sure that is going to be the case."
The proposal could stifle innovation, preventing new products from ever reaching consumers. Many commonly accepted products, from variable-rate loans to laddered CDs, began as innovations.
"There's probably going to be a tension between consumer choice here, and keeping things simple and understandable for the consumer," Min says, noting that choice is not always a good thing for the public -- such as during the mortgage meltdown. "You had a couple of good products being drowned out by the crappy products because mortgage broker incentives were misaligned."
Keest notes that new agency would draw staff from the consumer divisions of the existing financial regulators. "This is not another layer of bureaucracy, it's taking the same cars in the train and reassembling them under a different conductor," she says.
Overview of the planThe financial reform proposal stretches over 88 pages and is divided into five sections on robustly supervising firms, comprehensively regulating markets, protecting consumers, raising international standards and giving government the tools to manage financial crises. It calls for:
- Creating a Consumer Financial Protection Agency with a primary mission to protect consumers from abusive or fraudulent financial products. Companies would have to provide a one-page summary of disclosures to make it easy for customers to understand the terms.
- Creating a Financial Services Oversight Council that would guard against risks to the overall financial system and resolve turf wars between different regulators. Capital and liquidity requirements would rise for all firms, with the most strict rules for the biggest institutions.
- Giving the Securities and Exchange Commission, or SEC, and Commodity Futures Trading Commission more power to regulate over-the-counter derivatives, complex investments based on the price of another asset.
- Forcing large hedge funds to register with the SEC and open their books to regulators.
- Giving the Federal Reserve Board power over any large financial institution whose failure would threaten the financial system.
- Expanding the power of the Federal Deposit Insurance Corp. to take over and shut down faltering firms. All loan originators would have to keep 5 percent of the loans they package.
- Eliminating the Office of Thrift Supervision and forcing all savings and loans to become national banks under the oversight of the Office of the Comptroller of the Currency.
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