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Financial Reform Obama Banks Regulation Trusts Regulators Performance Clinton Federal Reserve News Democrats Republicans Consensus on Need for Financial Reform, But Not Obama’s Proposal

(June 18, 2009--Chicago, IL) -- From greater regulation of independent trust companies to “harmonizing” state and federal oversight, there is something for just about everyone in President Obama’s 88-page proposal to reform financial regulation and that, critics say, may be its undoing. The reform proposal was released yesterday.

Under Obama’s proposal, a new Financial Services Oversight Council would oversee and coordinate efforts among federal regulators. This new body, while similar to the existing Federal Financial Institutions Examination Council, would have decision-making powers versus the FFIEC’s more limited coordinating duties.

The proposal would eliminate the Office of the Thrift Supervision and meld it and the Office of the Comptroller of the Currency into a new National Bank Supervisor. The new agency would be given all the “authorities to require reports, conduct examinations, impose and enforce prudential requirements, and conduct overall supervision” of all federally chartered banks and foreign banks.

The Federal Reserve and the FDIC would retain their bank supervision oversight. The Federal Reserve’s authority over bank holding companies, however, would be substantially expanded. The proposal also would expand the definition of bank under the BHC to include trust companies and make parent companies subject to the BHC, if they are not already.

Firewalls between banks and their affiliates would be strengthen, says Obama, closing existing “holes.” One such hole, according to the proposal, is in transactions between banks and private investment vehicles they sponsor or advise. No additional clarification of what this means was provided. However, the proposal makes clear that the Federal Reserve’s discretion to provide exemptions from these new firewall “should be limited.”

Other impacts on trust bankers include seeking to put state and federal charters on similar playing fields. “To further minimize arbitrage opportunities associated with the multiple remaining bank charters and supervisors,” says Obama, “we propose to further reduce the differences in the substantive regulations and supervisory policies applicable to national banks, state member banks, and state nonmember banks. We also propose to restrict the ability of troubled banks to switch charters and supervisors.

While senior House and Senate Democrats believe that reforms can clear the Congress this year that may be wishful thinking.

The proposal requires the Federal Reserve to propose recommendations by October 1, 2009 to better align its structure and governance with its authorities and responsibilities. Assuming that date is met, it is highly unlike that Congress will act before year-end.

Industry associations and Republicans agree that reform is needed, but disagree with much of Obama’s proposal.

According to Edward Yingling, president, American Bankers Association, “we believe the Administration's proposal is so vast and controversial that it will be extremely difficult to enact and will produce great uncertainty in the financial markets and among financial regulators while it is pending.” He adds that that the proposal, “needlessly rips apart all the existing regulatory agencies, eliminates charter choices, and creates a new agency with powers to mandate loans and services that go well beyond consumer protection.”

Republicans on June 11 introduced their own reform package. Interestingly, their package greatly resembles that proposed by President Clinton in 1993. Regarding supervision, their plan strips the Federal Reserve of its supervisory powers, focusing its mission on monetary policy. It combines the OCC and OTS into one agency and makes the combined agency the primary regulator of all federally chartered banks, including those currently supervised by the FDIC.

While some financial reform in this session of Congress appears likely, early opposition and past experience suggest that its final version will look different than that proposed yesterday.

For more on this see the upcoming issue of Trust Regulatory News.

No statement in this issue is offered as or should be construed as legal opinion or advice or as an indicator of future performance.

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