The Federal Reserve would take on a greatly expanded role in financial regulation under new legislation unveiled on Monday by a top Senate Democrat, in a push to move ahead with the regulatory reform that has been a top priority of President Barack Obama.
The bill by Senator Christopher Dodd would give the Fed the power to break up big firms that could threaten the stability of the financial system if they suffered serious problems.
The Fed would also gain authority over the nation's largest bank-holding companies and become the home to a new consumer watchdog with oversight on mortgage-related businesses and some large nonbank financial firms, such as insurers.
Dodd released the 1,336-page bill less than a week after efforts at a bipartisan compromise broke down. Lawmakers have been arguing for months about regulatory reform following the worst financial crisis in generations that tipped the economy into a deep recession that reverberated globally.
In addition to addressing concerns over how to maintain the financial system's stability, the bill takes aim at regulating the risky financial instruments that have been blamed for contributing to the financial crisis and protecting consumers from risky financial products that have also been blamed for their role in the crisis.
Although financial markets had been on edge ahead of the release of the legislation, bank stocks barely flinched following its unveiling, as the proposal contained no surprises. The KBW Banks index of large bank stocks closed up 0.2 percent after having been down roughly 1 percent earlier in the day.
The new legislation comes less than a week after efforts at a bipartisan compromise in the Senate Banking Committee collapsed, and Dodd is pushing hard to win reforms. The future of reform legislation, however, remains uncertain, with Republicans and bank lobbyists working to weaken or block new rules that would threaten the financial sector's profits.
But with November congressional elections near, the White House and Dodd are gambling that Republicans ultimately will shy from killing reform for fear of being painted as close allies of the deeply unpopular financial services industry.
Obama on Monday welcomed the Dodd legislation and promised to fight any efforts to water it down. This proposal provides a strong foundation to build a safer financial system, the president said in a statement.
As the bill moves forward, I will take every opportunity to work with Chairman Dodd and his colleagues to strengthen the bill and will fight against efforts to weaken it.
BILL'S FUTURE UNCERTAIN
Brian Gardner, policy analyst for investment firm Keefe Bruyette & Woods, said the Dodd bill contained few surprises since most of it was telegraphed already.
He said he expects it to win Senate Banking Committee passage, but was uncertain if Congress would complete a bill this year.
Good luck trying to handicap this thing. So many people have been wrong about this thing for months now, he said.
We believe Senator Dodd will force this bill through the Senate Banking Committee by the end of next week, said Jaret Seiberg, policy analyst at investment firm Concept Capital, noting that it will likely pass the committee without a single Republican vote.
Seiberg and other analysts expect that the bill will probably make its way to the full Senate for a decisive vote in late April.
Senator Richard Shelby, the top Republican on the banking committee, said in an interview with CNBC on Monday before the bill was unveiled that Dodd will need a lot of Republican help to get financial reform approved in the Senate.
Any bill that emerges from the committee would need 60 votes in the Senate to overcome procedural roadblocks sure to be thrown up by Republicans; the Democrats control 59 seats.
FED'S REVERSAL OF FORTUNE
The expanded role for the Fed proposed under the bill represents something of a turnabout, coming just months after Dodd called the Fed's record as a bank supervisor and consumer protection regulator an abysmal failure.
The U.S. central bank has come under withering criticism by other lawmakers, both Republicans and Democrats, over recent months of its handling of events that led to the worst financial crisis in decades and its response to the crisis.
But under the Dodd bill, the Fed would become the home agency of a new consumer financial watchdog, gain break-up power over financial firms, and have supervision authority over bank holding companies with over $50 billion in assets.
It would lose its supervision, however, of state-chartered banks with less than $50 billion in assets. Dodd wants to transfer them to Federal Deposit Insurance Corp. oversight.
The consumer watchdog, first proposed by Obama as an independent agency, could write rules and enforce them at banks with assets over $10 billion, mortgage-related businesses and some large nonbank financial firms, such as insurers.
The bill would create a new framework for dealing with big firms that could threaten the stability of the financial system. The threat from firms seen as too-big-to-fail became a concern at the height of the financial crisis, when the federal government pumped hundreds of billions of dollars into firms such as insurer AIG to save them from collapse.
The bill would create a systemic risk council and allow the Fed, with the council's approval, to order the break-up of large firms judged to pose a threat to economic stability.
The bill also contains a version of what has been dubbed the Volcker rule to curb proprietary trading at banks, and bank sponsorship of hedge funds and private equity funds.
The Dodd bill requires such steps be enacted, but not until a study of the issue is done by the systemic risk council.
The original rule was proposed by Obama and named after White House economic adviser Paul Volcker, a former Fed chairman.
Dodd said the Congress needs to move quickly on reform, with only about 60 legislative days to go before lawmakers shift their focus to the November election campaigns.
We don't have many days left to get this job done. So there is a sense of urgency. ... We do need to act, he said.
(Additional reporting by Karey Wutkowski, Rachelle Younglai Kim Dixon, Caren Bohan and Jeff Mason in Washington and Joe Rauch in New York; Editing by Leslie Adler)