When Senate Banking Committee Chairman Chris Dodd promised a "bold" vision of regulatory reform early this year, he clearly wasn't kidding.

A draft version of his bill introduced on Tuesday was so far-reaching it would pick a fight with virtually every entrenched interest involved in the debate, including community banks, large financial institutions, the Obama administration, House Democrats, the Federal Deposit Insurance Corp. (FDIC) and the Federal Reserve Board.

The Connecticut Democrat acknowledged at a press conference announcing the bill that he would undoubtedly have to compromise as the process moved forward, but said he wanted to start with the strongest package possible.

"I could have tried to draft something that was already a compromise of ideas in a sense, but I think you make a huge mistake by doing that," Dodd said. "You're given very few moments in history to make this kind of a difference. We're trying to do that and I think this is important."

Many observers said Dodd's strategy was smart, and though it could take longer to see a final product as a result of starting with so much work still to do, Dodd was likely to get a stronger bill out of the Senate than if he had compromised early on.

For starters, his strong stance is likely to force participants involved in the debate to pick their battles carefully. The draft appears calculated to find out just how far he can push his colleagues on a variety of issues, from preemption to a consolidated regulator and the creation of a consumer protection agency.

Dodd also appears to be already trying to build support for the bill by including some of his colleagues' pet issues as part of the reform package. For example, Sen. Jack Reed, who has pushed for tougher regulation of derivatives, said Tuesday that he was pleased with the legislation, which included many of his ideas.

Similarly, Sen. Mark Warner, who has introduced a bill that would give the government greater resolution powers of systemically important firms, saw some of that legislation ending up as part of Dodd's package.

Still, though Warner and other Democrats went out of their way to say they are standing behind Dodd, the Virginia Democrat told reporters there are several aspects of the bill he is hoping to change. He hinted that while he does not oppose the creation of a consumer protection agency, enforcement of new rules should still be left to bank supervisors.

"I still have some concerns," he said. "Clearly, there needs to be enhanced consumer protection … [but] who's going to set those rules are still questions I have. It doesn't necessarily mean that who is going to set the rules enforces the rules, so there are different ways to get to that."

One thing is clear: Dodd will need all the support he can muster. It took only a few minutes for industry groups to start voicing objections to the bill, and it was clear regulators would also be pushing back.

By far the most controversial move is a provision that would strip the Fed and FDIC of their bank supervisory responsibilities and house all bank regulation in a new Financial Institutions Regulatory Administration (which would also include a merged Office of the Comptroller of the Currency (OCC) and Office of Thrift Supervision(OTS)).

Although Dodd would require the new agency to have a division devoted to community banks, that did not go far enough for community bank representatives. They are concerned a single regulator would focus first on the needs of the largest institutions, and effectively destroy the dual banking system.

"We are adamantly opposed to a single regulator," said Camden Fine, president of the Indepedent Community Bankers of America. "The 15 or 20 largest banks will soon dominate that regulatory agency. … There will be no counter voice."

The bill would also provide a break to some smaller banks on exam fees. The new agency would be funded by assessments on all institutions and holding companies with more than $10 billion of assets. State-chartered banks and bank holding companies below that level would be exempted.

But the Fed and FDIC are both expected to fight hard to keep their bank supervisory responsibilities. Fed Chairman Ben Bernanke has made it clear that a loss of bank holding company supervision would cripple its ability to conduct monetary policy. FDIC Chairman Sheila Bair has also opposed a single regulator, warning that the largest institutions would effectively capture it.

Dodd acknowledged Tuesday that it would be a tough fight, but said a single regulator would improve the system. "This is not a time for timidity in this area," he said. "This is a time for some sweeping and bold changes. It's been a long time coming. We're in the 21st century. We're basically looking at a regulatory structure that was designed in the early part of the 20th century."
Dodd's bill goes much further than the House bill, which would just combine the OCC and OTS.

Whether the Obama administration will help on this front remains unclear. Treasury officials considered and rejected proposing the creation of a single bank regulator, concluding that pushing for one was likely to be politically unrealistic. "The biggest thing that jumps out is the consolidation of the bank regulators from four down to one. There doesn't seem to be that much support for it politically," said Douglas Elliott, a fellow with the Brookings Institution. "The administration has not proposed it. I don't know that they have a big problem with it, but they had certainly concluded it was not worth the political pain that it would require. This wasn't a fight that the administration wanted to pick."

The administration is likely to be more upset with how Dodd handles systemic risk. Instead of giving it to the Fed, as Obama has pushed for, Dodd would create a new agency controlled by a nine-member board that includes the financial regulators and an independent chairman appointed by the president.

Treasury Secretary Timothy Geithner has warned that a regulatory council would lack proper accountability.

Under the Dodd bill, the new agency would have the power to limit the growth of or break up complex banks. It would be tasked with setting new rules for systemic firms, including requiring the use of contingent capital, a new debt instrument that converts to equity in the event of a crisis. Larger firms would also face tougher capital and leverage standards.

Yet another fight would center on the proposed consumer protection agency and preemption. Under the Dodd bill, the new agency would set and enforce federal standards to protect consumers. States would have the power to write and enforce their own standards, provided they were tougher than the federal rules.

The Republicans, and some moderate Democrats, oppose the CFPA.

"CFPA is going to be where the central battle is," said Jaret Seiberg, an analyst with Washington Research Group, a division of Concept Capital. "This is the starting point. I don't think anyone believes this is the bill that is going to get enacted."

The bill would also take other steps. It would eliminate the thrift charter, which goes beyond what the House has pushed for. It would also change how deposit insurance premiums are calculated to include assets, a move that would put more of the burden on the larger institutions who do not rely on deposits for their funding.

Dodd's bill also takes a sharply different approach to restricting commercial companies that want to own banks. The House version would block additional commercial firms from owning industrial loan companies and other limited-purpose institutions, and subject existing nonfinancial owners to tougher regulation under the Federal Reserve Board.

But Dodd's version would establish a three-month moratorium on new bids by commercial firms and require a Government Accountability Office report 18 months after the bill's passage to determine if tougher restrictions on existing owners are needed.

Further, the bill would revamp how the Federal Reserve banks must choose their presidents.


Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.