Financial Regulatory Reform and the 111th Congress

Baird Webel, Coordinator
Specialist in Financial Economics

David H. Carpenter
Legislative Attorney

Marc Labonte
Specialist in Macroeconomic Policy

Rena S. Miller
Analyst in Financial Economics

Edward V. Murphy
Specialist in Financial Economics

Gary Shorter
Specialist in Financial Economics

The financial regulatory reform being considered in the 111th Congress is the continuation of a policy debate beginning before the September 2008 financial panic. For example, Treasury Secretary Henry Paulson issued a blueprint for financial reform in March 2008. In September 2008, after this blueprint was issued but before congressional action, the financial system suffered severe distress as Lehman Brothers and AIG failed. This accelerated the review of financial regulation and refocused some of the policy debate on areas that experienced the most distress.

Treasury Secretary Timothy Geithner issued a new reform plan in June 2009. House committees initially reviewed many related bills on an issue-by-issue basis. House Financial Services Committee Chairman Barney Frank then consolidated proposals into a comprehensive bill, the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173) and the House passed the bill on December 11, 2009. H.R. 4173 as passed by the House contains elements of H.R. 1728, H.R. 2571, H.R. 2609, H.R. 3126, H.R. 3269, H.R. 3817, H.R. 3818, H.R. 3890, and H.R. 3996. In April 2010, the Senate began consideration of Senator Christopher Dodd's bill, the Restoring American Financial Stability Act of 2010 (S. 3217). On May 20, 2010, The Senate passed the House companion measure, H.R. 4173, after substituting the Senate's bill language as amended.

One issue in financial reform is the potential reorganization of the financial system regulatory architecture. Currently, the United States has many regulators, some with overlapping jurisdictions, but many believe there are gaps in the oversight of some issues. This structure evolved largely in reaction to past financial crises, with new agencies and rules created to address the perceived causes of the particular financial problems at that time. One option would be to consolidate agencies that appear to have similar missions. Another option would be to remove regulatory authority on a particular topic from the multiple agencies that might address it within their area now, and establish a single agency to address that issue. For instance, a single consumer financial protection agency or a single systemic risk regulator could be created. Both the House and the Senate bills would create a single entity to focus on consumer financial protection and consolidate bank regulators by abolishing the Office of Thrift Supervision. Neither the Housepassed nor the Senate-passed proposals would consolidate the securities and derivatives regulators or create a single systemic risk regulator. Both would create slightly differing councils of existing regulators to address systemic risk with authority to designate any entity as systemically significant and thus subject to oversight by the Federal Reserve.

Other issues of financial reform address particular sectors of the financial system or selected classes of market participants. For example, both the House-passed and the Senate-passed proposals would require more derivatives to be cleared through a regulated exchange and require additional reporting for derivatives that would remain in the over-the-counter market. There are several proposals to try to increase the amount of information available to regulators, investors, consumers, and financial institutions. Hedge funds would have increased reporting and registration requirements. Credit rating agencies would have to disclose additional information concerning their methodologies and potential conflicts of interest. A federal office would be created to collect insurance information. Institution-level regulatory agencies would have to share information about covered firms with systemic risk regulators. Proposed executive compensation and securitization reforms would attempt to reduce incentives to take excessive risks.

This report reviews issues related to financial regulation. It provides brief descriptions of the two main comprehensive reform bills in the 111th Congress that address these issues.


Date of Report: June 1, 2010
Number of Pages: 22
Order Number: R40975
Price: $29.95

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