Legislation overhauling regulation of the U.S. financial system, some 18 months in the making, took another step towards becoming a reality on Monday when Senator Christopher Dodd, chairman of the Senate Banking Committee, unveiled a draft bill outlining the framework for new regulatory infrastructure. Several components of the latest bill presented more stringent than had previously been expected, and painted a somewhat frightening picture of a “new normal” for Wall Street executives.
Most notably, Dodd gave the Fed the power to monitor large financial companies, a change from previous versions. Treasury Secretary Timothy Geithner and other Fed officials reportedly lobbied Dodd in recent weeks to expand the central bank’s power. Dodd withdrew a previous draft in November after Republicans objected to an independent consumer protection agency and a single bank regulator incorporating powers of the Fed, FDIC, Office of the Comptroller of the Currency, and Office of Thrift Supervision.
Other highlights of the bill include:
- Establishment of a new consumer protection agency within the Federal Reserve
- Allow the Fed to examine any bank with assets of $50 billion or more
- Establishment of a $50 billion fund to pay for future collapses
- Increased capital requirements for banks
- Hedge funds with over $100 million in assets would be required to register with the SEC and disclose financial data
- Banks would be limited from investing in or sponsoring hedge funds or private equity funds
- Shareholders would have a nonbinding “say on pay” for company executives
- Government would maintain power to seize failing financial institutions
Despite the potentially serious ramifications for Wall Street banks, many financials ETFs finished trading Monday about where they began, perhaps an indication of skepticism surrounding the odds that the most recent version will ultimately become law. Dodd was unable to gain support from Republican members of the Senate Banking Committee, an ominous absence in an increasingly-partisan Washington. Democrats are one seat short of a filibuster-proof majority, setting up another showdown over a piece of legislation aimed at bringing about a comprehensive overhaul.
The Financial Select Sector SPDR (XLF), which counts JP Morgan, Bank of America, Goldman Sachs, and Citigroup among its largest holdings, finished the day unchanged. Volume on Monday was about 70% of the average daily trading volume, suggesting that investors saw nothing unexpected or earth-shattering in Dodd’s latest draft. Many critical details of the plan were released over the weekend, giving investors a preview of the full version, and Monday’s release was apparently not vastly different from investor expectations.
The SPDR KBW Bank ETF (KBE), which seeks to track the performance of the KBW Bank Index, finished the day up nearly 0.30%, making it one of the best performers on Monday. KBW’s holdings include a number of firms that could potentially be impacted by the overhaul plan.
Disclosure: No positions at time of writing.