After nearly two weeks of maneuvering, the Restoring American Financial Stability Act of 2010 is being debated by the Senate. A number of amendments have been adopted but many more are still pending. This alert discusses the important changes to the bill that have been agreed upon, including a change in the “too big to fail” language and the possible change in the calculation of federal deposit insurance premiums that could increase the cost of deposit insurance for some banks and lower it for others. The alert also highlights some of the controversial, still pending, issues in the bill.
The Senate, after a week of procedural maneuvering, began last week to consider amendments to the Restoring American Financial Stability Act of 2010. The bill is scheduled to be considered for approximately two weeks by the Senate. The amendments last week suggest that bipartisan compromises are being forged in some areas, particularly as they relate to community banks. Also last week, in an important victory for the largest banks, the $50 billion fund to support the resolution of systemically significant financial institutions was abandoned in a compromise between Senator Christopher J. Dodd (D-CT), the Banking Committee Chairman, and ranking member Richard Shelby (R-AL). However, progress remains slow as nearly 189 amendments have been filed. Senator Shelby cautioned that “the overall legislation still has a long way to go to gain my support.”
Orderly liquidation fund
The Dodd-Shelby agreement on Title II’s $50 billion “Orderly Liquidation Fund” passed by a 93–5 vote. The fund had long been opposed by Republicans as having the effect of “institutionalizing” the “too big to fail” concept. As adopted, the $50 billion fund was replaced by an after the fact (post-failure) assessment to meet the costs of a liquidation of systemically significant institutions. The amendment also included limitations on the ability of the Federal Reserve Board to provide liquidity to the financial system in times of market distress and a requirement that the Treasury Secretary approve “emergency lending” by the Federal Reserve Board (“FRB”), along with strict accountability standards for such lending. The amendment retained the “Hotel California” provision, which prevents large (over $50 billion) bank holding companies from escaping the jurisdiction of the Financial Stability Oversight Council (“FSOC”) even if they abandon bank charters. The amendment also reflected language introduced by Senator Barbara Boxer (D-CA), which mandates that no “taxpayer funds” would be used to resolve systemically significant institutions.
Another provision adopted on May 5 would allow the FDIC to recover compensation paid to a failing company’s current or former senior executives if they were “substantially responsible” for the company’s failure.
An amendment sponsored by Senator Shelby to place the Consumer Finance Protection Bureau within the FDIC as opposed to an autonomous bureau within the FRB was defeated by a 38–61 vote.
In a change that should lower deposit insurance premiums for community banks and raise them for large banks, the Senate on Thursday, May 6, adopted a provision that would alter the manner in which federal deposit insurance premium assessments are imposed. Introduced by Senators John Tester (D-MT) and Kay Bailey Hutchison (R-TX), the amendment passed by a 98–-0 vote. Under current law, banks pay deposit insurance premiums based on the amount of domestic deposits they have. Under the amendment, assessments for deposit insurance would be based on a bank’s total assets net of tangible equity. This approach would have the effect of increasing deposit insurance premiums for banks with relatively low ratios of domestic deposits to total assets—generally the model followed by the largest banks. Lower insurance costs for deposits could in the future favor retail deposit gathering over wholesale funding and increase competition among all banks for retail deposits.
Important issues remain
As the Senate continues to deliberate, other important questions and amendments remain. For example:
- The Derivatives Provision in Title VII. Competing versions have been offered by Senate Agriculture and Senate Banking. The Senate Agriculture Committee’s version contains a provision requiring banks to terminate derivatives trading entirely. The Senate Banking Committee’s approach on derivatives would require that such trading be conducted on registered exchanges.
- Executive compensation provisions for all public companies, which would require, among other things, clawbacks for earnings restatements, an “independent compensation committee,” and “say on pay” provisions for shareholders
- Exemption from Sarbanes-Oxley § 404(b) “internal controls and financial reporting” for small issuers with less than $150 million in market capitalization
- New regulation within the SEC of rating agencies
- 5% “skin in the game” provisions for securitizers. An effort by Senator Bob Corker (R-TN) to eliminate this provision was rejected by the Senate by a 42 to 57 vote on Wednesday, May 12, 2010. Thus, unless reconsidered or modified in a later amendment, this provision appears likely to survive and be part of the final package adopted by the Senate.
- Limitation on ATM fees to 50 cents per transaction and credit card rates to 15%
- New FRB rules on “excessive” executive compensation or compensation practices that could lead to material loss
SEC registration exemption for banks
Banks will also benefit from a possible targeted change in the current 500 shareholder registration requirement by increasing the limit for registration in the ’34 Act to 2,000 persons for either a bank or a bank holding company. The amendment, sponsored by Senators Kay Bailey Hutchison (R-TX), Evan Bayh (D-IN) and Mark Pryor (D-AR), would, if adopted, facilitate capital raising by smaller banks or bank holding companies without requiring such banks or bank holding companies to become public companies. While not yet adopted by the Senate, indications are that this amendment has broad bipartisan support.
The upcoming schedule
Senators are expected to continue work on amendments to the legislation for the next one and possibly two weeks as many amendments are still pending and more are expected to be filed.