Key points of the reform bill:
Derivatives that trade 'over-the-counter' would be forced through central clearing houses to curb the risk from one counterparty going bankrupt and on to electronic exchanges to increase transparency. There would be exemptions for non-financial companies using the contracts to hedge risk. Banks would be forced to spin off their derivatives dealing operations.
Government can seize and wind up a large institution if it faces impending failure and poses a risk to the broader financial system. It would have powers to wipe out shareholders and fire executives. Payments to creditors would be paid by the government but recouped later from levies on the industry. It is designed to stop a repetition of the market shock from Lehman Brothers’ bankruptcy and end implicit government guarantees that reduce funding costs for banks deemed “too big to fail”.
Systemic risk regulation
Financial Stability Oversight Council of regulators chaired by the Treasury secretary would identify systemically significant companies and monitor markets for bubbles. Companies branded as systemically significant would face stricter capital, leverage and liquidity standards and be obliged to draw up a “living will” to describe how they would be broken up in the event of failure.
Deposit-taking banks would be forced to spin off proprietary trading arms and sell ownership interests in hedge funds and private equity firms. Named after Paul Volcker, former Federal Reserve chairman, who said banks should not be allowed to engage in “casino” activities while benefiting from government insurance over their deposits.
A new Consumer Financial Protection Bureau would be set up inside the Federal Reserve, but with complete independence from the central bank; it would tackle “abusive” mis-selling of mortgages, credit cards and other loan products.