On October 27, 2009, the House Financial Services Committee and the Treasury Department released a draft of the Financial Stability Improvement Act to address systemic risk and "too big to fail" financial institutions. Treasury Secretary Timothy Geithner testified to the House Financial Services Committee regarding the proposed legislation on October 29 and Congress is expected to hold additional hearings on the proposed legislation.
Among other things, the draft legislation includes the following provisions:
- Financial Services Oversight Council. The bill would establish the Financial Services Oversight Council to identify and monitor financial institutions and activities that pose a threat to financial stability, subjecting such institutions to heightened oversight. The council would also be responsible for the oversight, standards and regulation of payment, clearing and settlement activities.
- Expanded Federal Reserve Authority. The bill would expand the authority of the Federal Reserve and other federal regulatory agencies to regulate for financial stability purposes.
- Restructuring Of "Non-Bank" Banks. The bill would subject "non-bank" companies such as industrial loan companies to the oversight of the Federal Reserve by requiring these companies to create bank holding companies and would prevent additional commercial companies from owning banks, industrial loan companies or any other specialty bank charters.
- Eliminates Gramm-Leach-Bliley Act Exemptions. The bill would eliminate the provisions in the Gramm-Leach-Bliley Act that enabled many financial institutions subject to consolidated regulation to avoid federal oversight.
- Eliminates "Regulator Shopping." While the bill would not eliminate the thrift charter, it would prevent "regulator shopping" by subjecting thrift holding companies to Federal Reserve supervision. Currently, financial institutions can essentially choose their regulator, by obtaining thrift charters, which are regulated by the Office of Thrift Supervision (the primary regulator of the nation's thrifts). The Obama Administration had initially proposed to eliminate the Office of Thrift Supervision.
- Resolution Mechanism For Institutions That Pose A Systemic Risk. The bill would end the current approach for institutions that are "too big to fail" by creating a framework for the orderly wind-down of failing large financial institutions. The FDIC would have the authority to wind down such firms in a manner similar to its resolution authority for failing depository institutions. The bill would also establish a new method for paying the costs of resolution, which would be borne first by the failed institution's stockholders and creditors. If such amounts are insufficient, the costs would then be borne by a newly-established Resolution Fund, financed with fees assessed on certain financial institutions, similar to the FDIC's Deposit Insurance Fund. However, unlike the Deposit Insurance Fund, the Resolution Fund would not be funded until a firm has failed and becomes subject to resolution.
- Treasury Department Approval For Federal Reserve Lending. The bill would require Treasury Department approval before the Fed provides certain temporary liquidity assistance in emergency situations and confines such assistance to generally available facilities.
- Credit Risk Retention. The bill would require creditors to retain 10 percent or more of the attendant credit risks of loans that are sold or transferred for the purpose of securitization; this threshold would be subject to adjustment by regulatory authorities (but not below five percent).
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