Rama Krishna Vadlamudi, BOMBAY

June 28, 2010

The US Government’s efforts to cage Wall Street Banks has finally taken some concrete shape after intense negotiations among US lawmakers. The US Congress has decided to overhaul the US financial system by imposing various restrictions on Banks in the areas of proprietary trading, bank capital and Swaps. The Wall Street reform has been hailed as one of the most sweeping financial reforms since the reforms undertaken in the wake of Great Depression of the 1930s in the US. The US Democrats, led by President Barack Obama, have been trying to do something to rein in negligent banks which have been blamed for the global financial meltdown of 2008. The latest financial regulation reform bill is seen as an attempt by the US Government to control Wall Street financial firms, which have acted irresponsibly by playing with public money. The US banks have also been criticized for paying rich bonuses to their employees at the cost of taxpayers. The bill seeks to establish consumer financial protection. It tries to control financial firms from taking unwarranted risks that will threaten the economy. It wants to protect taxpayers’ money. After a long session of negotiations on June 24-25, 2010, the US legislators agreed for tougher restrictions on banks. This bill was approved by the US Senate. The reform bill will become law once it is approved by the House of Representatives and then signed into law by President Obama. This article is organized into the following topics: The important provisions of the US financial regulation reform bill What will be the impact of these reforms? What is the criticism of the bill? What the other Governments across the Atlantic are doing?

Rama Krishna Vadlamudi, BOMBAY
www.scribd.com/vrk100

June 28, 2010
vrk_100@yahoo.co.in

MY BLOG: www.ramakrishnavadlamudi.blogspot.com What are the key provisions of the US Financial Regulation Reform bill?
VOLCKER RULE: Named after the former chairman of the US Federal Reserve, Paul Volcker, the Rule tries to bar proprietary trading by banks for their own accounts; restrict banks’ investment in hedge funds and private equity funds; and limiting the liabilities that banks can hold. But, this Volcker Rule has been diluted. Now, the reform bill allows proprietary trading in certain areas, like, government debt, hedging purposes and small business investments. The new provision allows deposit-taking Wall Street banks to invest up to three per cent of their capital in hedge funds or private equity funds. Some analysts say these provisions may not be fully applicable for some banks for another seven years. The bill will set up a new Consumer Protection Agency, under the supervision of US Federal Reserve. The new agency will curb abusive practices by credit card companies and mortgage lenders. It may be recalled that reckless sub-prime lending in the US prior to 2008 had led to the near-collapse of banking system across the world in 2008. The new agency will be funded by fees that will be collected from banks. A new 10-member oversight council of financial regulators, headed by the Treasury Secretary, will be created to coordinate activities connected with regulatory oversight of financial markets & to monitory systemic risks Regulatory bodies will be given more powers to seize and conduct an orderly liquidation of large banks, like, Citibank. Large banks will be required to raise their capital. But, they will be given a time of five years to comply with this requirement. Most of the derivatives trading from now onwards will have to be done through third-party exchanges. Swaps: The size of the over-the-counter (OTC) derivatives market is USD 615 trillion. The bill allows banks to do trading in foreign exchange and interest rate swaps, which account for bulk of the OTC market. However, the bill requires banks to spin off dealing desks into affiliates for handling agricultural, energy and metal swaps, equity swaps and uncleared credit default swaps. In future, most of the OTC derivatives trading will be done through more accountable and regulated channels such as clearing houses and exchanges. The reforms are expected to cost USD 19 billion. A new tax will be imposed on banks to recover the cost of implementing the reforms. Credit rating agencies will be subject to more scrutiny. They must disclose their methodologies.

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Rama Krishna Vadlamudi, BOMBAY
www.scribd.com/vrk100

June 28, 2010
vrk_100@yahoo.co.in

MY BLOG: www.ramakrishnavadlamudi.blogspot.com What will be the impact of these reforms?
o Banks will make lesser profits due to curbs on proprietary trading, which allowed bank traders to take riskier bets with depositors’ money on bank’s accounts The decision to move most of the OTC derivatives trading to exchanges will improve transparency in swaps trading. This will allow authorities to regulate swaps in a better manner. The curbs on trading in credit default swaps will hit banks profits adversely Smaller banks will have a breather from the new rules. Banks, with less than USD 15 billion in assets, will be exempted from the rules. It remains to be seen whether the bill will be able to prevent the kind of bank excesses we have seen in the past and which led to the global financial meltdown of 2008

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What is the criticism of the reform bill?
It is a watered down version of what was originally proposed. As democrats lack full majority in the US Congress, they have allowed some amendments in order to satisfy the viewpoints of republicans in the Congress. Of course, some democrats also opposed certain provisions. Now, the reform bill allows proprietary trading in select areas, like, government debt, hedging purposes and small business investments. The new provision allows deposit-taking Wall Street banks to invest up to three per cent of their capital in hedge funds or private equity funds. Three per cent of capital for big banks, like, Goldman Sachs, is very big amount, some argue. The regulation is too late as it comes after 20 months since the collapse of Lehman Brothers in September 2008.

Will the reform bill be able to cage unruly banks?
Even though some portion of swaps business will be taken out of banks into affiliates, banks will still be able to do in-house trading in foreign exchange and interest rate swaps, which form a major chunk of swaps market. Banks have to increase their capital; but they are given a time of five years to fulfill this rule. They will be able to invest in hedge funds and private equity; though with quantitative limits. The so-called Volcker Rule has been diluted. All these dilutions and compromises indicate that it may be business as usual for banks on Wall Street despite tall talk of sweeping reforms. Of course, a good beginning has been made to control unmanageable banks on the Wall Street.

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Rama Krishna Vadlamudi, BOMBAY
www.scribd.com/vrk100

June 28, 2010
vrk_100@yahoo.co.in

MY BLOG: www.ramakrishnavadlamudi.blogspot.com What are the other Governments doing across the Atlantic?
As the global financial crisis has impacted almost all the major financial centres across the world, other Governments too have been raising their voices about bank regulation in their own countries and regions. Europe wants to levy a new tax on banks to create crisis funds. The European Union is proposing to impose restrictions on activities of hedge funds and private equity funds. These proposals are yet to attain a concrete shape as they have to be approved by the EU, which is an amalgam of 27 member countries. However, the United Kingdom (the UK is not a part of the Euro Zone), under the new coalition Government, is making sweeping changes to its financial regulation. The changes are: The Financial Services Authority (FSA) will be scrapped and the Bank of England (BoE) will be entrusted with the task of financial regulation. At present, the FSA is the single regulator for banks, mutual funds and insurance companies. The UK Government will create a new Financial Policy Committee within the BoE. The Committee will be headed by Mervyn King, the governor of the Bank of England. Two new regulators will be created. The first is Prudential Regulation Authority, under BoE, which will regulate banks, insurers, investment banks and other financial institutions. The second is a Consumer Protection and Markets Authority. Under the new dispensation, the BoE will be given more powers. Till now, the BoE is entrusted with the task of conducting monetary policy and fixing interest rates for the economy; while banking regulation is taken care of by FSA. But under the new laws, the FSA will be dismantled and the Bank of England will have to take up additional duties in the form of regulating banks and other financial institutions. Monetary stability and financial stability will now be the responsibility of the BoE. The UK government will levy a new tax on banks and impose curbs on bank bonuses The new system will be completed by 2012 Once these changes have come into effect, experts say that it will be possible to break up the UK’s biggest banks. However, some banks are opposing such moves by regulators.

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