Systemic Risk Bill Advances in House

The House Financial Services Committee passed HR 3996, the Financial Stability Improvement Act, by a strictly partisan vote of 31 to 27 on December 2, 2009, after months of hearings and several days of mark-ups in November. The legislation creates an industry-financed systemic risk fund which would be collected in advance of a financial crisis to be used to unwind large systemically risky banks or nonbank financial firms. This fund differs greatly from the Obama Administration's proposed fund, which would be paid for by taxes before industry fees were collected. The legislation also creates a Financial Services Oversight Council, chaired by the Treasury Secretary, populated by federal regulators with non-voting seats for a state insurance commissioner and a state banking supervisor, and supported by the Federal Reserve (the Fed), which will monitor the financial industry for potential systemic risk and identify dangerously interconnected firms for tougher prudential standards or potential break-up. The bill also combines the Office of Thrift Supervision with the Office of the Comptroller of the Currency for a more streamlined prudential regulatory process for banks.

The passed legislation contains over 60 amendments. Approved amendments of note include:

• An amendment from Chairman Barney Frank (D-MA) to reduce the Fed's prudential authority over firms deemed to be systemically risky.
• An amendment by Rep. Paul Kanjorski (D-PA) which authorizes the new oversight council to identify the 50 financial institutions deemed the greatest likely risk to the U.S. economy and authorizes the Fed to break up those firms.
• An amendment from Rep. Ron Paul (R-TX) and Rep. Alan Grayson (D-FL) which requires a thorough audit of the Fed with an eye toward loans made by the Fed under emergency powers granted in section 13(3) of the Federal Reserve Act (this amendment replaces an amendment offered by Rep. Mel Watt (D-NC) which would have audited the Fed without review of the Fed's decision-making and policy-crafting processes).
• An amendment from Chairman Frank which creates a Federal Deposit Insurance Corporation debt guarantee program to which institutions deemed a threat to the financial system could voluntarily contribute.
• An amendment from Rep. Brad Miller (D-NC) and Dennis Moore (D-KS) which would apply a 20 percent penalty to secured creditors of a dissolved firm.
• An amendment from Rep. Melissa Bean (D-IL) which replaces the word "resolution" with "dissolution" at every appearance in the bill.
• An amendment by Rep. Luis Gutierrez (D-IL) which collects the resolution fund from risk-based assessments of firms with assets over $50 billion ($10 billion for hedge funds).
• An amendment from Rep. Gutierrez capping the resolution fund at $150 billion with the potential to borrow another $50 billion from the Treasury when undercapitalized ($150 billion limit on borrowing authority).
• An amendment from Rep. Gwen Moore (D-WI) and Rep. Jackie Speier (D-CA) which specifies that insurance companies are eligible for systemic risk consideration and that state regulators would be responsible for the insurance company's resolution.

Chairman Frank initially planned on bringing the legislation to a vote on November 20, 2009, but faced a revolt from Congressional Black Caucus Committee members who were unhappy with the Obama Administration's financial recovery focus (specifically its lack of attention to minority communities, where unemployment rates are double the national average). It appears that these concerns were not satisfactorily addressed, as the vote was conducted without the Black Caucus.Chairman Frank expects the full package of reform bills passed by his committee to reach the Rules Committee by Tuesday, December 8, and to reach the House floor for debate by Wednesday, December 9.