I am going to pick and choose some features I find interesting:
1. Implications for the Fed: Some early legislative proposals involved taking power away from the Fed, particularly its regulatory power over small banks. The Fed does lose some of that (banks with less than $50 billion in assets will be regulated by either the FDIC or the Comptroller - OCC), but it gains some power as a consumer watchdog, and as a "systemic regulator." Something I did not see reported was this:
The president of the New York Federal Reserve Bank will be appointed by the President of the United States, with the advice and consent of the Senate. The New York Federal Reserve president is a permanent member of the Federal Open Market Committee, the Bank executes open market operations and is an important source of information on capital markets, and the Bank supervises many important bank holding companies. However, the president of the New York Federal Reserve Bank is currently chosen by the Bank’s directors, 6 of whom are elected by member banks in that district.This is very interesting, and I'm not sure whether this is good or bad. On the one hand, under the current rules, whereby the New York Fed President is appointed by the Board of Directors of the New York Fed, the possibility exists that the New York Fed President could be unduly influenced by Wall Street interests. Indeed, this New York Times piece calls into question Treasury Secretary Geithner's behavior as New Fed President in this respect. On the other hand, do we think we can trust the President of the United States (current, past, or future) not to be intimidated by Wall Street? I don't think so.
2. Consolidation and clarification of regulatory authority: I like this line from the summary:
Experts agree that no one would have designed a system that looked like this.Yes, but the problem is that we did. The proposal here is for a clear demarcation of regulatory responsibility among the FDIC, OCC, and the Fed. The FDIC and OCC get the small banks, the Fed the large ones. The legislation would get rid of the Office of Thrift Supervision (OTS) which appears to have been a culprit during the demise of Washington Mutual. This is clearly a step forward, though it would have been nice if OCC had met its demise as well. Unfortunately, though the legislation would do away with one regulator, it creates another - the Office of National Insurance. This seems like a bad idea. The legislation needs to recognize that it is difficult, and will become more difficult, to distinguish between banks and other financial intermediaries. A comprehensive approach to regulating all financial intermediaries is needed. Why not put the insurers under the Fed's supervision, and give them access to the discount window?
3. Glass-Steagall restrictions: Some features of the bill represent moves to put Glass-Steagall-type restrictions back in place, to separate banking from other elements of what goes on in financial markets. These have to do with the "Volcker rule," and Blanche Lincoln's proposal that bank's spin off derivatives activity. First, banks are quite innovative in getting around restrictions imposed in terms of specific financial instruments and activities. It is better to write the restrictions in terms of risk-taking, to give the regulators more flexibility and discretion in deciding what individual financial institutions can or cannot do. Second (and this relates to point 2 above), there is no point in sticking to obsolete notions of what a "bank" is. Canadian banks, for example, perform some standard banking functions along with investment banking, and this does not appear to cause problems.
4. Too-Big-to-Fail: Here the legislation gets somewhat murky. Apparently there will be a Financial Stability Oversight Council with some vague mandate to monitor systemic risk (hard to define at the best of times). Large financial institutions are supposed to design their own "funeral plans," and there is to be a liquidation procedure for large financial institutions that
requires Treasury, FDIC and the Federal Reserve all agree to put a company into the orderly liquidation process. A panel of 3 bankruptcy judges must convene and agree - within 24 hours - that a company is insolvent.We have to get 3 regulators to agree to put liquidation into motion? Good luck. However, at least there is some orderly procedure in place, though I'm not sure we can trust any of these institutions to come up with socially optimal "funeral arrangements."
5. Retail payments: This was not in the summary document, but other sources report that there will be changes that will affect the pricing of credit card and debit card services. Over the years, credit card issuers in particular have developed clever mechanisms to extract monopoly rents. For example, a typical credit card contract written by the credit card company (Visa for example) with a retailer specifies that the retailer must accept the card even for very small transactions, and must charge the same price for credit card and cash transactions. Thus, Visa can extract surplus from the retailer, but not in a way that reduces the quantity of credit card services sold - indeed this does just the opposite. Elements in the legislation would make these contractual arrangements illegal. I'm sure retailers like these proposals, but it is not clear they would be better off if their customers use cash with greater frequency. This implies that the retailer will have a higher stock of cash on hand, and thus be a more lucrative target for thieves. We seem to have an inconsistent policy concerning retail payments in general. We seem to have come to the conclusion that the issue of circulating currency should be a monopoly given to the central bank, but the credit card and debit card business appears to have essentially free entry. Historically, some private monetary systems (e.g. the one in Scotland in the early nineteenth century, or Canada until 1935) worked quite well, but were certainly not unregulated. Maybe there are lessons from how these monetary systems were regulated that we can use in thinking about the optimal regulation of credit card and debit card systems.